CfllCA^o/II. 

REPORT 


ON   THE 


/ 


INVESTIGATION 


OP  THE 


CHICAGO  TELEPHONE  COMPANY. 


COMMITTEE 


ON 


GAS,  OIL  AND  ELECTRIC  LIGHT 


HON.  ANTON  J.  CERMAK,  CHAIRMAN 


BY 

EDWARD  W.  BEMIS 


REPORT 


ON   THE 


INVESTIGATION 


OF   THE 


CHICAGO  TELEPHONE  COMPANY 


SUBMITTED    TO    THE 


COMMITTEE 


ON 


GAS,  OIL  AND  ELECTRIC  LIGHT 


HON.  ANTON  J.  CERMAK,  CHAIRMAN 


BY 

EDWARD  W.  BEMIS 


TABLE  OF  CONTENTS. 


Letter  of  Transmittal    , 7 

Introduction    8 

Territory  Covered   9 

Previous  Investigations 9 

Some  Contracts  with  Other  Companies  10 

The  Problem  Before  Us 11 

Gross  Earnings,  Expenses  and  Profits   13 

Operating  Expenses    14 

Payment  to  the  American  Telephone  and  Telegraph  Company 15 

Maintenance  and  Depreciation  Eeserve   18 

Decline  in  Maintenance   19 

Similar  Tendencies  in  St.  Louis 21 

Changes  in  the  Art  21 

Long  Life  Property,  Proportion  of : 24 

Depreciation  Reserve  of  the  Company 25 

The  Appraisal 26 

Copper    27 

Overhead    28 

Land    29 

Land,  Base  and  Overhead 30 

Paving    31 

Working  Capital 33 

Plant  Development,  Cost  of  33 

Development  of  Business,  Cost  of 34 

Early  Profits   35 

Present  Value 36 

Life    36 

Depreciated  or  Present  Value  38 

Methods  of  Building  Up  a  Depreciation  Reserve 40 

Maintenance  and  Depreciation  in  Other  Bell  Companies 41 

Rate  of  Return 44 

Possibilities  of  Reduction   46 

Toll  Earnings  and  Expenses  48 

Municipal  Requirements — The  Subway   48 

Depreciation,  Extraordinary   49 

Office  Buildings  and  Equipments,  Displacement  of 52 

Semi-Mechanical  Switchboards  53 

Extraordinary  Depreciation,  Conclusions  on   54 

Ordinance  of  1907,  Results  of  54 

Improvements  in  the  Service   55 

City  Telephone  Bureau 55 

Measured  Service  for  Residences 56 

Meters   56 

Conclusions    37 

Statement  of  Prof.  Bemis 100 

Present  Value  of  the  Property 101 

Comparison  of  Recorded  Costs  with  New  Appraisal 101 

Rental  to  A.  T.  &  T.  Co 103 

Maintenance    104 

Past  Profit  and  Charges 106 

Proposed  Ordinance  107 

Reduction  in  Rates  and  Charges  107 

Summary  of  Reductions 110 

Increase  in  Wages Ill 

Summary  of  Wages,  Pensions  and  Disability  Benefits 115 

Meters    116 

The  Telephone  Bureau  116 


LIST  OF  TABLES. 


Table.  Page. 

1.  Expenses  and  Profits  since  1890 13 

2.  Percentage  of  Expenses  and  Profits  to  Investment 14 

3.  Kentals  to  American  Telephone  and  Telegraph  Company 17 

4  Depreciable  Property  and  Percentage  for  Maintenance 19 

5  Declining  Ratio  of  Maintenance  to  Investment 20 

6.  Repairs  and  Reconstruction  1903   21 

7.  Appraised  Value  New 26 

8.  Copper  since  1892   27 

9.  Overhead,  Summary  of   29 

10.  Land  Appraisal  and  Cost  30 

11.  Land,  Base  and  Overhead 30 

12.  Rejected  Items  and  Conceded  Value   36 

13.  Life    37 

14.  Salvage    37 

15.  Annual  Depreciation    38 

16.  Present  or  Depreciated  Value   38 

17.  Maintenance  and  Depreciation  of  Bell  Companies,  including  Long  Dis- 

tance     42 

18.  Maintenance,    Depreciation    and   Investment    of    Bell    Companies,    aside 

from  Long  Distance   43 

19.  Expenses  and  Profits  Within  City,  Revised 48 

20.  Earnings  and  Telephones  since   1904 55 

21.  Declining  Rate  of  Return,  with  Additional  Bonds 58 


LIST  OF  APPENDICES. 


Appendix.  Page. 

1.  Balance  Sheets  since  1880 59 

2.  Appraisal,  Chicago  and  Suburban 66 

3.  Appraisal,  City   68 

4.  Cost  of  Property  New,  City  and  Suburban   

5.  Growth  of  Plant  71 

6.  Plant  and  Cost  Statistics: 

A.  Underground  Conduit   72 

B.  Underground  Cable  and  Wire 73 

C.  Underground  Conduit  and  Cable   73 

D.  Central  Office  and  Subscribers'  Station   Kquipment 74 

E.  Total  Equipment  and  Stations 74 

F.  Maintenance  since  1890 75 

G.  Conduit  and  Wire  since  1883 75 

H.     Wire  and  Stations  since  1883 76 

7.  Base  Figures  vs.  Book  Value   77 

8.  Base,  Overhead  and  Total  Appraisal 80 

9.  Buildings,  Appraisal  vs.  Book  Value   83 

10.  Defense  of  Building  Appraisal,  by  J.  G.  Wray 84 

11.  Subway  Construction,  Effect  of  (According  to  J.  G.  Wray) 87 

12.  Growth  of  Investment  and  How  Paid  For 90 

13.  Depreciation,  How  Treated  by  Company  91 

14.  Maintenance  and  Addition  to  Reserve,  in  City,  1908-12 93 

15.  Composite  Life,  Salvage  and  Annual  Depreciation 94 

16.  Quantities  According  to  Inventory,  City  and  Suburbs 95 

17.  Chart  Illustrating  Decline  in  Maintenance 97 

18.  City  Purchase,  Provisions  of  Ordinance    98 


COMMITTEE 

on 

GAS,   OIL  AND  ELECTRIC  LIGHT 

of  the 
CITY  COUNCIL  OF  THE  CITY   OF   CHICAGO 


Aid.  ANTON  J.  CERMAK,  Chairman. 

Aid.  JOSEPH  F.  BYAN,  Aid.  JOHN  P.  STEWART, 

Aid.  THEODORE  K.  LONG,  Aid.  JAMES  B.  BOWLER, 

Aid.   EUGENE  BLOCK,  Aid.  JACOB  A.  HEY, 

Aid.  FRANK  VAVRICEK,  Aid.  JOHN  HADERLEIN, 

Aid.  ALBERT  W.  BEILFUSS,  Aid.  CHARLES  TWIGG, 

Aid.  LEWIS  D.  SITTS,  Aid.  FELIX  JANOVSKY, 

Aid.  STANLEY  S.  WALKOWIAK,  Aid.  JAMES  A.  KEARNS. 


City  Hall,  Chicago,  Oct.  25,  1912. 

Alderman  Anton  J.  Cermak,  Chairman  Committee  on  Gas,  Oil  and  Electric  Light 
of  the  City  Council,  Chicago,  111. 

Dear  Sir: 

I  herewith  transmit  the  results  of  my  studies  of  the  Chicago  Telephone  Com- 
pany, so  far  as  they  relate  to  the  ability  of  the  Company  to  reduce  rates  or  im- 
prove the  service. 

Until  the  Committee  shall  decide  upon  the  wisdom  of  my  recommendations 
upon  these  matters,  an  apportionment  of  the  total  amount  of  reduction  in  rates 
to  the  various  classes  of  service  need  not  be  made. 

Invaluable  assistance  has  been  rendered  from  the  beginning  to  the  present 
time  by  the  accounting  firm  of  Marwick,  Mitchell,  Peat  &  Co.,  and  particularly  by 
the  head  of  the  Chicago  branch,  Mr.  James  Hall,  and  his  assistant,  Mr.  Andrew 
Sangster.  Their  work  not  only  appears  in  the  special  report  which  they  submitted 
to  me  some  time  ago,  and  which  is  herewith  transmitted  to  the  Committee,  but  in 
the  constant  assistance  they  have  rendered  in  following  out,  at  my  suggestion,  spe- 
cial lines  of  inquiry  into  the  accounts  of  the  Company. 

In  the  large  amount  of  investigation  which  has  been  necessary  in  the  prep- 
aration of  this  report,  the  Chicago  Telephone  Company  has  fully  co-operated.  The 
ordinance  of  November  6,  1907,  gives  the  City  access  to  the  plants  and  accounts  of 
the  Company.  But  the  officials  have  gone  farther  than  this,  and  have  assisted  in 
working  out  data  and  in  making  investigations  requested  by  the  City's  representa- 
tives. 

Very  respectfully  submitted,  / 

EDWAED  W.  BEMIS. 


Introduction. 

The  regulation  of  telephone  rates  in  large  cities  by  any  public  body  is  prac- 
tically a  virgin  field.  Aside  from  the  action  of  the  Chicago  City  Council,  Novem- 
ber 6,  1907,  fixing  the  rates  now  charged  in  Chicago,  there  have  been  only  two 
notable  studies  of  the  subject  in  this  country.  One  in  1909-10  by  the  Massachu- 
setts Highway  Commission  for  Boston  and  its  suburbs,  and  one  in  1911  by  the 
Maryland  Public  Service  Commission,  for  the  City  of  Baltimore. 

There  have  been,  to  be  sure,  several  investigations  of  the  telephone  rates  in 
smaller  places,  by  the  Wisconsin  Eailroad  Commission  and  the  New  Jersey  Public 
Utilities  Commission,  but  they  have  little  direct  bearing  upon  Chicago  conditions. 
The  same  lack  of  application  to  conditions  here  applies  to  an  investigatian  in  Los 
Angeles  and  one  in  Seattle,  in  each  of  which  cities  there  are  two  competing  com- 
panies of  substantially  equal  size. 

No  court  or  commission  has  thus  far  brought  together  such  tabulated  com- 
parisons of  operating  expenses,  construction  costs,  etc.,  per  unit  or  telephone  plant 
or  of  service  rendered,  as  is  the  case  with  gas,  electric  light  and  street  railways. 

This  has  been  partly  due  to  the  rapid  growth  of  the  telephone  business  and 
partly  to  the  reliance  hitherto  upon  competition  in  most  sections  outside  of  New 
England,  rather  than  upon  public  regulation.  With  the  tendency  of  late  to  division 
of  territory  between  the  Bell  Company  and  the  independent  companies,  the  need 
of  information  to  serve  as  a  basis  for  public  regulation  is  now  seriously  felt. 

Furthermore,  the  relations  of  local  Bell  companies  to  the  American  Telephone 
and  Telegraph  Company,  hereafter  to  be  referred  to  by  its  usual  abbrevaition,  the 
A.  T.  &  T.,  are  so  close  that  it  is  difficult  to  study  local  conditions  without  the 
help  of  the  National  government  as  to  the  facts  with  regard  to  the  parent  com- 
pany, whose  business  is  nation  wide.  Fortunately,  the  power  to  secure  this  in- 
formation has  just  been  granted  to  the  Interstate  Commerce  Commission,  but  it 
will  take  time  to  secure  results  from  this  source. 

In  Europe  and  Australia  the  telephones  are  so  largely  owned  by  the  national 
governments,  and  conditions  are  so  different  from  here,  that  little  help  can  be 
secured  in  that  direction. 

All  this,  together  with  the  magnitude  of  the  interests  at  stake,  make  the 
Chicago  investigation  difficult.  We  have  here  to  deal  with  the  second  largest 
telephone  company  in  the  world.  Only  New  York  has  more  telephones  than  Chi- 
cago. Contrast  the  251,614  'phones  in  Chicago,  January  1,  1912,  with  the  220,781 
in  London,  85,961  in  Paris  and  133,860  in  Berlin,  at  the  same  time,  and  with  the 
453,000  in  Greater  New  York,  of  which  number  326,122  were  in  the  Borough  of 
Manhattan.  According  to  the  United  States  Consular  Reports  for  1912  (page  357), 
the  entire  number  of  telephones  taken  over  by  the  British  Government  on  January 
1  from  the  National  Telephone  Company  was  only  560,000  for  all  of  Great  Britain 
and  Ireland,  or  only  72%  more  than  were  operated  by  the  Chicago  Telephone 
Company  in  the  city  and  suburban  district,  and  only  2%  times  the  number  within 
the  city  limits.  The  number  of  telephones  throughout  Canada  in  1911,  according 
to  the 'United  States  Consular  Report  from  March  28,  1912,  was  only  302,759,  or 
less  than  in  Chicago  and  its  suburbs.  The  American  Telephone  and  Telegraph 
Company  gives  the  following  as  the  number  of  telephones  (partly  estimated)  in 
various  countries,  January  1,  1912.  The  number  in  use  by  the  Chicago  Telephone 
Company  in  the  city  and  suburbs  is  given  for  comparison: 

Chicago  Telephone  Company  335,652 

Canada  335,000 

West  Indies  17,000 

South  America  120,000 

Australasia  124,000 

Oceanica  17,000 

Asia  166,000 

Africa  41,000 

Europe  3,239,000 

All  the  world  outside  the  United  States,  Europe  and  Canada  is  reported  as 
having  only  517,000  'phones,  or  less  than  twice  the  number  in  the  Chicago  district. 


,  Territory  Covered. 

The  Chicago  Telephone  Company  embraces  two  divisions,  the  city  and  the 
suburban.  The  city  division,  with  a  population  of  2,1  Ho, 283  in  1910,  covers  the 
area  of  the  city,  which  since  July  17,  1911,  has  been  194.4  square  miles.  The  sub- 
urba/n  division,  with  a  population  of  656,65;")  in  1910,  embraces  5,194  square  miles, 
extending  fully  100  miles  along  the  lake  and  from  30  to  60  miles  back  from  the 
lake.  Thus  the  Company,  covering  388  square  miles,  embraces,  Lake,  Cook,  Mc- 
Henry,  Kane,  Du  Page,  Kendall,  Grundy  and  Will  Counties  in  Illinois,  and  Lake 
and  Porter  Counties  in  Indiana.  It  includes  Elgin,  Aurora  and  Joliet,  111.;  Gary 
and  Valparaiso,  Ind.,  and  toll  lines  to  Kenosha  and  Lake  Geneva,  Wis. 

There  are  33  exchanges  in  the  city  and  95  in  the  suburban  division;  25  of 
those  in  the  city  are  of  the  central  battery  type,  with  a  capacity  of  4,900  to  10,50(> 
subscribers.  Of  the  exchanges  in  the  suburbs,  23  are  of  the  same  type,  averaging 
a  capacity  of  about  4,900  subscribers.  There  are  in  the  city  eight  local  battery 
type  offices,  often  called  magneto  offices,  and  72  in  suburban  districts;  they  average 
only  200  subscribers.  Conditions  in  every  way  are  quite  different  in  the  city  and* 
suburban  district;  in  the  former  the  wires  are  mostly  in  underground  conduitsr 
.while  in  the  latter  they  are  in  overhead  cables  or  are  bare  wire  on  poles.  In  the 
city  a  large  part  of  the  service  is  on  a  measured  basis;  in  the  suburbs  it  is  on  a 
flat  rate  basis,  such  as  is  common  in  small  cities  and  rural  communities.  The  reve- 
nues and  expenses,  naturally,  differ  in  these  two  sections.  The  city  has  jurisdic- 
tion only  of  the  rates  and  services  within  the  city,  and  special  attention,  there- 
fore, must  be  given  to  that  part  of  the  business  of  the  Company.  Since,  however, 
it  is  one  company  in  both  city  and  suburbs,  and  since  it  is  impossible  to  separate 
entirely  the  two  branches,  it  is  well  to  begin  with  a  study  of  the  Company  as  a 
whole  and  then  take  up  the  city  division. 

Previous  Investigations. 

Three  investigations  of  the  Chicago  Telephone  Company  have  been  made.  The 
first,  covering  substantially  a  year,  under  the  auspices  of  the  Committee  on  Gas, 
Oil  and  Electric  Light  of  the  City  Council,  aided  by  the  telephone  engineers, 
Messrs.  D.  C.  Jackson,  W.  H.  Crumb  and  G.  W.  Wilder,  ended  with  the  passage 
by  the  City  Council  of  the  telephone  ordinance  of  November  6,  1907,  under  which 
the  Company  is  now  operating.  The  second  investigation  concluded  May  9,  1910, 
was  by  Messrs.  D.  C.  and  W.  B.  Jackson,  engineers,  and  Messrs.  Young  fe  Com- 
pany, accountants,  for  the  year  ending  March  31,  1910.  This  was  made  to  the 
City  Comptroller,  Mr.  W.  H.  Wilson,  and  was  a  supplement  to  a  report  they  had 
already  made,  December  30,  1908,  outlining  a  plan  of  accounting  for  the  Tele- 
phone Company.  The  report  of  May  9,  1910,  was  considered  by  the  Committee 
on  Gas,  Oil  and  Electric  Light,  in. various  sessions,  from  May  19  to  June  2,  1910. 
The  fact  that  the  accountants  employed  were  also  accountants  for  the  Telephone 
Company  led  the  Committee  to  vote  on  June  2d  that  other  experts  should  be  em- 
ployed to  go  over  the  report. 

On  June  16,  1910,  the  Committee  on  Gas,  Oil  and  Electric  Light  were  informed 
by  its  sub-committee  that  Mr.  W.  J.  Hagenah,  of  Madison,  Wis.,  had  been  engaged 
To  do  this  work.  From  January  5  to  January  23,  1911,  the  Committee  considered 
Mr.  Hagenah 's  report  covering  the  calendar  year  1909.  To  enable  Mr.  Hagenah 
to  report  on  the  changes  in  each  of  the  several  classes  of  rates  that  could  be 
wisely  made  in  connection  with  a  total  reduction  of  about  $200,000,  the  Committee, 
-on  January  23,  took  a  recess. 

The  consideration  of  the  finaJ  report  of  Mr.  Hagenah,  dated  May  2,  1911,  was 
postponed  until  after  the  consideration  of  the  gas  ordinance.  Immediately  there- 
after, on  July  17th,  the  undersigned  was  asked  to  take  up  the  investigation.  A 
prior  engagement  caused  more  or  less  of  delay,  until  it  finally  seemed  wise  to 
include  not  only  the  prosperous  experience  of  the  Company  in  1910,  under  4;he 
reduced  rates  of  the  1907  ordinance,  but  also  to  include  the  rapid  growth  of  the 
Company  and  its  continued  prosperity  in  1911.  It  also  developed,  near  the  close 
of  1911,  that  the  Company,  in  the  summer  of  1911,  had  undertaken  an  expensive 
and  exhaustive  inventory  and  appraisal  of  all  its  property.  It  was  so  evidently 
unwise  to  ignore  such  an  appraisal  that  no  apology  need  be  made  for  delaying  the 


10 

report  until  the  Company  was  able,  August  17,  1912,  to  place  the  entire  results  of 
this  valuation  at  the  disposal  of  the  City,  and  until  those  results  could  be  given 
the  consideration  which  their  importance  and  bulk,  in  nine  large  volumes, 
demanded. 

According  to  the  Jackson-Young  report,  the  existing  rates  yielded  only  3.83% 
on  the  investment.  After  paying  5%  interest  on  the  bonds  and  8%  dividends  on 
the  stock,  properly  applicable  to  the  investment  within  the  city  limits,  there  was, 
if  the  report  be  accepted,  a  deficit  for  March  31,  1909-10,  on  business  within  the 
city  limits,  of  $908,533.52.  These  figures  were  based  upon  the  theory  of  the 
investigators  that  the  Company  was  not  allowing  a  sufficient  amount  for  deprecia- 
tion. The  Company  had  spent  $622,296  that  year  on  reconstruction  and  replace- 
ments. The  investigators  considered  that  the  depreciation  for  the  year  was  in 
excess  of  this  amount  by  $956,626.20. 

In  his  final  report,  for  May  2,  1911,  page  64,  Mr.  Hagenah  estimated  that  the 
Company,  after  paying  interest  on  its  bonds  and  8%  on  the  balance  of  what  he 
considered  its  depreciated  investment  within  the  city  limits,  would  have  had  a 
surplus  in  1909  of  $309,488.36. 

When  the  Committee  on  Gas,  Oil  and  Electric  Light  were  considering  sub- 
stantially these  figures,  on  January  23,  1911,  and  were  about  to  make  a  motion  to 
reduce  the  rates  charged  by  about  $216,000,  or  about  2%  of  the  gross  receipts, 
the  other  $100,000  of  surplus  being  considered  as  needed  by  the  Company  for 
emergencies,  Mr.  B.  E.  Sunny,  President  of  the  Chicago  Telephone  Company,  said: 

"An  attempt  to  distribute  that  amount,  $216,000,  would  be  futile,  first,  be- 
cause the  amount  is  wholly  erroneous;  second,  that  it  would  give  the  Telephone 
Company  rates  which  would  be  unreasonable  and  which  it  could  not  accept. 
*  *  *  There  is  no  chance  in  the  world  of  the  Telephone  Company  being  able 
to  accept  rates  on  the  basis  suggested." 

The  Committee  voted,  however,  as  follows: 

"That  Mr.  Hagenah  be  instructed  to  proceed  with  the  preparation  of  the 
schedule  of  telephone  rates  on  the  analysis  contained  in  the  report  made  to  the 
Committee,  and  that  he  reduce  the  rates  to  the  extent  of  the  surplus,  of  approxi- 
mately $216,000,  where  his  cost  analysis  shows  the  present  schedule  to  be  excessive 
or  inequitable,  and  that  the  said  schedule  of  telephone  rates  be  reported  back  to 
this  Committee  for  its  future  action." 

Mr.  Hagenah  held  that  the  plant  had  depreciated  22.5%  and  must  set  aside 
yearly  $2,717,890  within  the  city  for  maintenance  and  to  meet  depreciation,  or 
13.65%  of  the  then  value  and  11.61%  of  the  book  cost  of  the  property,  including 
land  and  working  capital. 

In  this  situation,  with  Mr.  Hagenah  basing  the  possibility  of  a  reduction 
of  $216,000  upon  the  assertion  of  an  amount  of  depreciation  which  President 
Sunny  denied,  it  became  exceedingly  important  to  have  the  fullest  access  to  the 
books  of  the  Company  throughout  its  history,  and  to  study  the  appraisal  just 
completed  for  the  Company  by  Messrs.  Byllesby  and  Arnold. 

Some  Contracts  with  Other  Companies. 

The  Chicago  Telephone  Company  differs  from  many  other  public  utilities  in 
several  very  important  respects: 

1.  The  Company  has  not  only  thrown  open  all  of  its  books  and  other  accounts 
and  plants  to  the  inspection  of  the  City's  representatives,  as  contemplated  in  the 
ordinance   of   1907,   but   it   has   freely   given   much   other   valuable   material   and 
assistance  which  it  was  under  less  obligation  to  .furnish.     Inquiries  which  called 
for  considerable  investigation  were  much  more  promptly  and  fully  answered  than 
is  customary,   or  than   could   have   been   legally   demanded.     There   has   been   no 
evidence  of  an  attempt  to  keep  back  anything  that  was  asked  for  relative  to  the 
Company. 

2.  There  have  been  no  fires,  suspicious   or  otherwise,  to   destroy   the   early 
records  of  the  Company. 

3.  There  has  been  no  change  of  ownership  to  complicate  the  situation.     One 
company,  and  that  one  always  controlled  by  the  A.  T.  &  T.  Co.,  has  been  in  charge 


11 

since  the  first  consolidation  in  1881,  two  years  after  the  beginning  of  the  tele- 
phone business  in  Chicago. 

4.  There   has  been   no   telephone  competition   in  the  city  since   1880,   with 
the    exception    of    the    thus    far    negligible    competition    of    the    Chicago    Tunnel 
Company. 

5.  There  were  no  early  losses  or  failure  to  pay  both  development  costs  and 
good  dividends  out  of  the  revenues  of  the  Company  from  the  very  start. 

6.  While  there  have  been  increases  of  plant  out  of  earnings  and  increases  of 
stock  to  represent  this  new  plant,  without  direct  payment  at  the  time  in   cash 
by  the  stockholders,  the  par  value  of  the  outstanding  stocks,  bonds  and  notes 
has  rarely  exceeded,  and  on  January  1,  1912,  did  not  exceed,  the  present  value  of 
the  physical  assets  of  the  Company.     In  other  words,  water,  in  the  sense  of  the 
excess  of  outstanding  securities  above  tangible  assets,   does   not   appear   in   the 
stock  of  the  Company. 

7.  A  depreciation  reserve  of  about  $5,000,000,  or  over  15%  of  the  outstanding- 
stocks  and  bonds,  has  been  accumulated  out  of  earnings  to  meet  depreciation,  and. 
has  been  invested  in  extensions. 

Some  of  these  points  will  be  enlarged  upon  elsewhere.  It  is  sufficient  now  to 
congratulate  the  Chicago  Telephone  Company  upon  its  unique  position  in  combining 
so  many  good  features. 

The  investigation  of  the  profits  and  the  regulation  of  rates  are  made  far 
less  difficult  by  the  above  situation. 

On  the  other  hand,  because  of  the  great  size  of  the  Company,  with  over 
$35,000,000  of  assets,  and  with  a  service  touching  most  closely  the  homes  and 
comfort  and  business  of  the  entire  city,  and  because  of  the  novelty  and  com- 
plexity of  the  problems  to  be  handled,  there  is  call  for  the  most  thorough 
investigation  and  the  most  judicial  thought  that  can  be  brought  to  the  task. 

The  revenues  of  all  the  gas,  water  and  telephone  properties  controlled  by  the 
Wisconsin  Kailroad  Commission  are  no  greater  than  those  of  the  Chicago  Tele- 
phone Company. 

The  Problem  Before  Us. 

The  problem  before  us  arises  from  the  ordinance  of  November  6,  1907,  giving 
a  franchise  to  the  Chicago  Telephone  Company  until  January  8,  1929. 

It  provided,  with  reference  to  that  portion  of  the  Company's  business  within 
the  city  limits,  a  complete  control  by  the  City  Council  of  rates  for  periods  of  five 
years  each,  after  the  expiration  of  the  first  thirty  months.  The  rates  for  the  first 
two  and  one-half  years  were  prescribed  in  the  ordinance  of  1907.  Since  the  City 
Council  has  not  prescribed  new  rates  since  1907,  those  ordered  for  the  first  thirty 
months,  ending  in  April,  1910,  have  continued. 

The  full  provisions  of  the  city  ordinance  of  November  6,  1907,  on  this  point 
are  here  quoted: 

' '  7.  Future  Kate  Eegulation — Special  Ordinance — Eight  Keserved — Consent 
of  Company. 

' '  The  City  Council,  as  one  of  the  conditions  of  the  grant  of  the  privileges 
herein  conferred  upon  the  Chicago  Telephone  Company,  hereby  reserves  to  itself 
the  right  from  time  to  time  during  the  period  of  this  grant,  by  special  ordinance 
amendatory  hereof,  to  hereafter  establish,  fix,  prescribe  and  regulate  the  rates, 
charges,  prices  and  tolls,  or  other  compensation  or  any  limitations  thereupon,  for 
each  and  every  kind  of  service,  facilities  and  equipment  which  the  Chicago  Tele- 
phone Company  furnishes  or  supplies,  or  may  furnish  or  supply,  in  the  City  of 
Chicago,  un'der  this  ordinance,  and  also  the  basis,  method,  manner  and  means  of 
computing,  exacting,  imposing,  paying  and  collecting  such  rates,  charges,  prices 
and  tolls,  or  other  compensation  of  said  Chicago  Telephone  Company. 

' '  Included  in  the  right  or  rights  above  reserved  to  the  City  Council  is  the  right 
to  hereafter  alter,  change  or  reduce  the  maximum  rates  for  any  service,  facilities 
or  equipment  hereinbefore  described,  and  any  other  rates,  charges,  prices,  tolls 
or  compensation  for  any  service,  facilities  or  equipment  which  may  now  or  here- 
after under  this  ordinance  be  established,  fixed,  prescribed,  imposed  or  collected 
by  said  grantee,  as  the  City  Council  may  deem  expedient  and  reasonable,  and  to 
pass,  by  a  special  amendatory  ordinance,  from  time  to  time,  all  reasonable  rules 


12 

and  regulations  relative  to  the  rates,  charges,  prices,  tolls  or  other  compensation 
of  said  grantee,  for  any  service,  facilities  or  equipment.  The  Chicago  Telephone 
Company,  by  the  filing  of  the  acceptance  of  the  terms  and  conditions  of  this 
ordinance  hereinafter  provided  for,  shall  be  understood  as  expressly  consenting 
and  agreeing  to  promptly  accept,  adopt,  put  into  effect  and  operate  its  system 
of  wires,  cables,  electrical  conductors,  poles  and  conduits,  in  the  City  of  Chicago 
under  any  reasonable  schedule  or  schedules  of  rates,  charges,  prices,  tolls  or  com- 
pensation for  telephone  service,  instruments,  facilities  or  equipment,  or  for  all 
or  any  of  them,  or  any  reasonable  schedule  or  schedules  of  limitations  upon  such 
rates,  charges,  prices,  tolls  or  compensation,  or  any  reasonable  rules  and  regulations 
relating  thereto,  and  also  the  basis,  method,  manner  and  means  of  computing, 
exacting,  imposing,  paying  and  collecting  such  rates,  charges,  prices  and  tolls, 
or  other  compensation  of  said  Chicago  Telephone  Company,  which  the  City  of 
Chicago  may,  by  special  amendatory  ordinances,  establish,  fix  or  prescribe  from 
time  to  time,  after  the  expiration  of  thirty  months  from  the  time  this  ordinance 
goes  into  force  and  effect,  and  any  reasonable  schedule  or  schedules  of  rates, 
charges,  prices,  tolls,  or  other  compensation  for  any  other  service,  instruments, 
facilities  or  equipment,  other  than  those  herein  mentioned,  or  for  all  or  any  of 
them,  or  any  reasonable  schedule  or  schedules  of  limitations  upon  such  other  rates, 
charges,  prices,  tolls  or  compensation,  or  all  or  any  of  them,  or  any  reasonable 
rules  and  regulations  relative  thereto,  which  the  City  of  Chicago  may,  by  special 
ordinance,  establish,  fix  or  prescribe  from  time  to  time  after  this  ordinance  goes 
into  force  and  effect.  Provided,  that  any  schedule  or  schedules  of  rates,  charges, 
prices,  tolls  or  compensation  or  of  limitations  thereupon,  which  are  established, 
fixed  or  prescribed  as  aforesaid  shall  not  be  fixed  by  the  City  of  Chicago  to 
continue  for  a  period  of  more  than,  or  of  less  than,  five  years,  unless  at  the  time 
of  the  passage  of  any  such  special  amendatory  ordinance  the  unexpired  term  of 
this  grant  is  less  than  five  years. 

"Whenever  the  City  desires  to  take  up  the  regulation  of  rates  as  hereinbefore 
provided  for,  the  Comptroller  shall  give  to  the  Chicago  Telephone  Company  at  least 
thirty  days'  notice,  and  shall  require  the  Company  to  produce,  and  the  Company 
shall  produce,  all  the  facts,  data  and  information  in  its  possession  which  the  City 
may  require  to  assist  the  City  to  make  a  proper  and  reasonable  regulation  of  rates. 

"If  at  any  time  said  Chicago  Telephone  Company  shall  in  any  way  contest 
or  deny  the  reasonableness  of  any  rates,  charges,  prices,  tolls  or  other  compensa- 
tion, or  any  limitation  or  limitations  thereupon,  for  any  kind  of  service,  facilities 
or  equipment  prescribed  by  a  special  amendatory  ordinance,  as  hereinabove  pro- 
vided, or  by  a  general  ordinance  as  hereinafter  provided,  and  pending  the  deter- 
mination of  any  proceeding,  litigation  or  contest  whatever,  shall  collect  or  receive 
rates,  charges,  prices,  tolls  or  other  compensation  in  excess  of  the  rates,  charges, 
prices,  tolls  or  other  compensation,  or  any  limitation  or  limitations  thereupon 
fixed  by  ordinance,  said  Chicago  Telephone  Company  shall  upon  the  final  deter- 
mination of  any  such  proceeding,  litigation  or  contest  repay  to  each  and  all  of 
its  lessees,  subscribers  and  patrons  the  excessive  amount  which  it  has  collected 
or  received  therefrom,  together  with  interest  thereon  at  the  rate  of  five  per  cent. 
(5%)  per  annum  from  the  date  of  said  collection  or  receipt  unless  the  unreason- 
ableness of  the  rates,  charges,  prices,  tolls  or  other  compensation,  or  any  limita- 
tion or  limitations  thereupon,  which  have  been  attacked,  shall  have  been  estab- 
lished. 

"Eight  of  Kegulation  by  General  Ordinance  Eeserved. 

"Nothing  in  this  ordinance  contained  shall  be  construed  or  taken  as  prevent- 
ing the  City  of  Chicago  whenever  it  shall  be  empowered  by  the  General  Assembly 
so  to  do  from  passing  from  time  to  time  any  general  ordinance  or  ordinances 
establishing,  fixing,  prescribing  or  regulating  the  rates,  rentals  or  charges  of  tele- 
phone companies  for  any  service,  instruments,  facilities,  equipment  or  licensing, 
regulating  or  taxing  telephone  companies,  it  being  the  intention  of  this  ordi- 
nance that  the  City  of  Chicago  shall  in  no  way  surrender  any  right  it  may  now 
have  or  may  hereafter  acquire  to  tax,  license  or  regulate  telephone  companies 
or  to  establish,  fix,  prescribe  or  regulate  the  price,  rates,  rentals,  charges  or 
compensation  to  be  charged  for  telephones,  or  any  service,  facilites  or  equip- 
ment; provided,  also,  that  nothing  in  this  ordinance  contained  shall  be  construed 
as  preventing  the  City  of  Chicago  from  granting  an  ordinance  to  any  other 


13 

telephone  company.  The  Chicago  Telephone  Company  by  the  acceptance  of  this 
ordinance  shall  be  understood  as  agreeing  to  comply  with  the  terms  and  condi- 
tions of  any  reasonable,  general  ordinance  or  ordinances  passed  as  aforesaid." 

Evidently  the  first  question  to  be  determined  is  the  amount  of  profit  that  the 
Company  has  made  during  the  four  years  of  operation  of  the  existing  ordinance, 
and  the  ratio  of  that  profit  to  the  actual  investment  in  the  property. 

Other  questions  will  follow,  such  as  the  relation  of  investment  to  present  value, 
the  amount  needed  for  depreciation,  the  reasonable  rate  of  return,  prospects  of 
future  profits  and  costs  as  affected  by  possible  competition,  the  building  of  sub- 
ways, etc. 

Gross  Earnings,  Expenses  and  Profits. 

In  the  following  tables  are  presented  the  actual  receipts  and  the  actual 
expenditures  as  shown  by  the  books  of  the  Company  since  1890.  Allowances  for 
depreciation  and  other  reserves  not  actually  expended  are  omitted.  The  account- 
ants have  made  a  few  minor  adjustments  of  the  books  in  the  table  below,  but 
only  one  is  of  sufficient  importance  to  deserve  mention,  and  that  is  of  not  any 
large  importance. 

Unusual  expenditures  of  1911  of  $144,583.92  on  account  of  the  appraisal  and 
$44,453.40  in  connection  with  a  strike,  or  a  total  of  $189,037.32,  were  in  large 
part  thrown  back  and  apportioned  over  the  last  seven  years,  thus  making  the 
burden  less  severe  in  1911. 

The  investment  in  Table  2  is  based  on  the  cost  reported  by  the  Company  on 
its  books  without  any  deductions  for  depreciation. 


TABLE    1. 

EXPENSES    AND    PROFITS,    CITY    AND    SUBUKBAN. 
Before  Making  Additions  to  the  Depreciation  Reserves. 


Yr.  Ended 
Dec.  31.         Earnings. 

Expenses. 

Miscellaneous 
Net  Earnings.     Revenue. 

Net  Profit. 

1891 

$   1,036,569.19 

$    597,469.90 

$    439,099.29 

$  3,689.45 

$    442,788.74 

1892 

1,194,715.58 

738,184.30 

456,531.28 

4,093.15 

460,624.43 

1893 

1,417,829.73 

881,451.53 

536,378.20 

536,378.20 

1894 

1,479,878.85 

902,057.02 

577,821.83 

2,950.94 

580,772.77 

1895 

1,616,028.79 

1,036,396.64 

579,632.15 

18,931.87 

598,564.02 

1896 

1,797,567.17 

1,059,164.00 

738,403.17 

22,237.51 

760,640.68 

1897 

1,908,615.11 

1,039,169.47 

869,445.64 

18,869.85 

888,315.49 

1898 

2,137,609.48 

1,210,214.17 

927,395.31 

16,089.70 

943,485.01 

1899 

2,480,184.12 

1,477,596.99 

1,002,587.13 

17,930.53 

1,020,517.66 

1900 

2,870,489.44 

2,065,021.19 

805,468.2* 

21,214.84 

826,683.09 

1901 

3,484,130.95 

2,197,770.28 

1,286,360.67 

27,226.89 

1,313,587.56 

1902 

4,290,950.99 

2,781,390.23 

1,509,560.76 

27,868.21 

1,537,428.97 

1903 

5,308,201.13 

3,495,831.06 

1,812,370.07 

45,315.03 

1,857,685.10 

1904 

6,265,124.57 

3,602,428.85 

2,662,695.72 

59,730.39 

2,722,426.11 

1905 

7,016,057.39 

4,346,963.09 

2,669,094.30 

42,149.07 

2,711,243.37 

1906 

7,810,293.54 

4,920,422.46 

2,889,871.08 

52,181.51 

2,942,052.59 

1907 

8,635,102.08 

6,621,059.09 

2,014,042.99 

56,703.06 

2,070,746.05 

1908 

8,617,238.09 

6,642,647.95 

1,974,590.14 

81,768.37 

2,056,358.51 

1909 

9,745,954.46 

7,238,688.52 

2,507,265.94 

54,589.07 

2,561,855.01 

1910 

.      11,092,879.07 

7,824,205.70 

3,268,673.37 

42,934.01 

3,311,607.38 

1911 

12,474,022.15 

8,836,827.49 

3,637,194.66 

43,540.78 

3,680,735.44 

14 

TABLE   2. 

PEE    CENT.    EARNINGS,    EXPENSES    AND    NET    RETURN    TO    AVERAGE 
INVESTMENT,   ELIMINATING   ALLOWANCE   FOR   DEPRECIATION. 

City  and  Suburban. 


Calendar 
Year. 

Total 
Telephone 
Earnings. 

Expenses 
of 
Operation. 

Net 
Telephone 
Earnings. 

Miscel- 
laneous 
Revenue. 

Net  Return 
to  average 
Investment. 

1891 

51.01% 

29.40% 

21.61% 

.18% 

21.79% 

1892 

42.11 

26.02 

16.09 

.14 

16.23 

1893 

38.23 

23.77 

14.46 

14.46 

1894 

35.83 

21.84 

13.99 

.07 

14.06 

1895 

36.52 

23.42 

13.10 

.43 

13.53 

1896 

37.42 

22.05 

15.37 

.46 

15.83 

1897 

36.92 

20.10 

16.82 

.37 

17.19 

1898 

37.61 

21.29 

16.32 

.28 

16.60 

1899 

36.68 

21.85 

14.83 

.27 

15.10 

1900 

34.39 

24.74 

9.65 

.25 

9.90 

1901 

33.59 

21.19 

12.40 

.27 

12.67 

1902 

33.17 

21.50 

11.67 

.22 

11.89 

1903 

34.54 

22.74 

11.80 

.29 

12.09 

1904 

36.77 

21.14 

15.63 

.35 

15.98 

1905 

37.77 

23.40 

14.37 

.23 

14.60 

1906 

36.67 

23.10 

13.57 

.25 

13.82 

1907 

33.90 

26.00 

7.90 

.22 

8.12 

1908 

29.77 

22.95 

6.82 

.28 

7.10 

1909 

31.40 

23.32 

8.08 

.17 

8.25 

1910 

33.13 

23.37 

9.76 

.13 

9.89 

1911 

33.53 

23.76 

9.77 

.12 

9.89 

City. 


1908 

31.91% 

25.21% 

6.70% 

.31% 

7.01% 

1909 

33.39 

25.34 

8.05 

.15 

8.20 

1910 

35.00 

25.16 

9.84 

.13 

9.97 

1911 

35.38 

25.58 

9.80 

.13 

9.93 

Operating  Expenses. 

No  conclusions  can  be  drawn  from  the  tables  just  given  until  a  study  is  made 
of  the  operating  expenses,  investment  and  reasonable  allowance  for  depreciation. 
Operating  expenses  will  be  first  considered. 

Of  the  total  average  expenditures  for  operation  and  new  construction  in  1911 
of  about  $13,183,339.79,  of  which  $8,836,827.49  was  for  operation,  the  payroll 
amounted  to  $6,332,485  and  taxes  to  $720,000.  There  is  no  evidence  that  these 
expenses  can  be  materially  reduced.  Expenditures  this  year  in  the  department 
of  station  removals  and  changes  are  falling,  but  on  the  whole  the  upward  trend 
of  wages  found  in  other  industries  has  affected  and  will  still  continue  to  affect  the 
telephone  business. 

In  a  report  of  the  United  States  Department  of  Commerce  and  Labor  to  the 
Senate,  February  23,  1910,  upon  telephone  companies  (61st  Congress,  2d  Session, 
Document  No.  380),  it  is  shown  (page  94)  that  outside  of  Colorado  and  further 
west,  Chicago  was  paying  higher  monthly  wages  to  its  operators  than  in  most 
other  cities. 

The  total  number  of  employes  in  1907 — 6,843 — had  an  average  monthly  pay- 
roll of  $43,97.  The  8,475  employes  in  1911  had  an  average  payroll  of  $51.31. 


15 

While  the  number  of  employes  had  increased  23.8%,  the  monthly  payroll  had 
increased  44.5%. 

Of  more  interest,  perhaps,  are  the  figures  for  the  traffic  department,  con- 
taining the  operators  who  handle  all  the  messages.  These  increased  from  4,090 
in  1907,  with  an  average  monthly  wage  of  $31.17,  to  5,116  in  1911,  with  an 
average  monthly  wage  of  $35.23.  The  average  pay  per  employe  increased  13%. 

The  pay  for  an  eight-hour  day  for  an  ordinary  operator  doing  no  Sunday 
or  holiday  work  rises  from  $23.84  a  month  during  the  first  six  months  of  employ- 
ment" to  $39  the  last  half  of  the  third  year,  and  by  successive  steps  to  $49.86  the 
tenth  year.  Higher  wages  are  given  to  supervisors,  whose  pay  gradually  increases 
to  $56.36  a  month  in  the  seventh  year. 

Plans  are  now  being  considered  for  a  pension  scheme  in  all  the  Bell  companies, 
which  will  add  somewhat  to  the  expenses  of  the  Company.  Further  increase  of 
wages,  with  increased  cost  of  living  and  the  increase  of  wages  elsewhere,  are  also 
likely  during  the  next  five  years. 

Since  the  Company,  however,  has  successfully  met  previous  increases  and 
seems  to  be  doing  quite  as  well  by  its  employes  as  do  other  telephone  companies, 
there  does  not  appear  to  be  any  reason  for  giving  further  consideration  to  the 
subject  at  the  present  time. 

The  Chicago  Telephone  Company  spends  more  money  per  telephone  than  do 
other  large  Bell  companies  in  operators'  wages,  schooling,  rest  and  lunch  room 
expenses.  In  this  respect  the  cost  per  telephone  in  Chicago  last  year  was  $1.87 
greater  than  the  average  of  all  the  Bell  companies,  and  $1.40  greater  than  in  the 
seaboard  states  from  Maine  to  Virginia. 

To  what  extent  this  excess  of  expenses  in  the  traffic  department  is  due  to 
the  large  number  of  nickel  'phones  and  the  extent  of  the  flat  rate  service,  and 
to  what  extent  it  is  due  to  better  wages  and  greater  interest  in  the  welfare  of  the 
employes,  it  has  been  found  impossible  to  determine.  Certain  it  is  that  the 
welfare  work,  such  as  rest  and  lunch  rooms,  schooling,  etc.,  among  the  employes 
is  carried  much  farther  in  Chicago  than  in  most,  and  probably  than  in  any  other 
places. 

The  yearly  expense  here  is  73  cents  a  telephone  for  these  purposes,  as  com- 
pared with  31  cents  on  the  average,  for  the  country  as  a  whole,  and  41  cents  on 
the  average  for  New  England  and  the  other  seaboard  states  north  of  the 
Potomac. 

Practically  all  supplies  and  materials  for  construction,  outside  of  buildings, 
are  obtained  from  the  Western  Electric  Company.  Since  the  majority  of  its  stock 
is  owned  by  the  A.  T.  &  T.,  which  also  owns  over  95%  of  the  stock  of  the  Chicago 
Telephone  Company,  there  is  naturally  some  suspicion  of  the  prices  paid  by  the 
local  company.  Investigation  elsewhere,  as  well  as  studies  that  it  has  been  possible 
to  make  in  preparation  of  this  report,  have  not  confirmed  these  suspicions.  At 
least,  so  far  as  the  present  report  is  concerned,  this  particular  matter  may  be 
omitted  from  further  consideration. 

Two  other  expenses,  aside  from  those  of  the  traffic  department,  are  materially 
greater  in  Chicago  than  elsewhere.  One  of  these  is  the  expense  from  station 
removals  and  changes,  and  the  other  is  the  expense  for  repairs. 

The  considerable  percentage  of  the  population  of  Chicago  which  moves  every 
year,  and  the  extent  to  which  the  cheaper  type  of  telephone,  the  nickel  'phone, 
has  been  extended,  are  supposed  to  account  for  the  difference  in  expenses  with 
regard  to  station  removals,  which  average  over  $2  per  telephone.  The  larger  cost 
of  repairs  in  Chicago  than  elsewhere  probably  has  a  tendency  to  keep  down 
the  need  for  renewals  and  will  be  considered  further  in  connection  with  the  subject 
of  depreciation. 

Payment  to  the  A.  T.  &  T. 

The  operating  expenses  thus  far  considered  were  higher,  in  some  respects, 
than  in  other  companies,  but  have  a  sufficient  justification  to  warrant  our  accept- 
ance of  the  same  in  this  report. 

Very  different  in  character  is  the  yearly  payment  by  the  local  company,  in 
common  with  every  other  Bell  Company,  of  4%%  of  its  gross  receipts  from 
telephones  to  the  A.  T.  &  T.  Co., — a  company,  it  must  be  remembered,  which,  by 


16 

its  ownership  of  the  majority  of  the  stock  of  these  various  companies,  stands  at 
both  ends  of  the  bargain.  The  more,  however,  that  the  right  hand — the  A.  T.  &  T. 
Co. — decides  that  its  left  hand — the  Chicago  Telephone  Company — shall  pay,  in 
the  form  of  a  percentage  of  the  gross  receipts,  the  higher  must  be  the  charges 
against  the  subscriber,  to  pay  this  disguised  dividend.  The  payment  made  by  the 
Chicago  Telephone  Company  in  1911,  of  $537,585.12,  amounted  to  $1.69  for  each 
of  the  318,135  telephones,  often  called  stations,  in  use  on  the  average,  during  the 
year.  It  was  equivalent  to  1.45%  of  the  average  investment  of  $37,194,587.95. 
(Hall's  Report,  pages  4,  36-9.)  The  payment  for  the  City  portion  of  the  business 
was  $445,550.42  and  will  doubtless  be  about  $500,000  in  1912. 

In  return  for  this  payment,  the  Chicago  company  receives  three  advantages: 
First,  the  rental,  with  all  repairs  and  renewals,  of  the  electrical  portion  of  the 
subscribers'  equipment, — the  transmitter,  receiver  and  induction  coil;  second, 
certain  patents;  and  third,  legal,  accounting  and  engineering  assistance  from  time 
to  time.  These  points  will  be  considered  in  the  above  order: 

1.  TRANSMITTER,  RECEIVER  AND  INDUCTION  COIL: 

The  Western  Electric  Company,  which  makes  these  instruments,  has  refused 
the  writer's  request  for  information  on  their  cost,  or  the  cost  of  maintenance  and 
renewals.  The  Kellogg  Switchboard  Company,  of  Chicago,  claims  to  sell  an 
equally  good  set  for  $2.80,  with  a  reduction  of  15%  if  brought  even  in  small  lots, 
in  connection  with  the  bell,  cord,  stand  and  other  small  parts  that  go  with  a  desk  or 
wall  outfit.  If  the  price,  under  these  circumstances,  and  with  the  discount,  is  only 
$2.38,  it  may  fairly  be  presumed  that  the  cost,  with  a  fair  profit  to  the  Western 
Electric,  which  supplies  all  these  parts  for  over  4,000,000  telephones,  must  be 
below  this  figure. 

For  our  present  purposes,  one  needs  to  know  not  only  the  cost  new,  and  the 
fact  that  about  one-fourth  of  the  number  are  yearly  returned  by  the  Chicago 
Telephone  Company  for  some  repairs,  but  also  the  cost  of  these  repairs,  and  the 
life  of  the  instrument  as  a  whole.  In  the  refusal  of  the  Western  Electric  to  give 
this  information,  we  may  fall  back  upon  the  fact  that  on  September  6,  1907,  the 
Chicago  Telephone  Company  met  the  bids  of  independent  companies  for  the  sale 
of  transmitters,  receivers  and  induction  coils,  by  agreeing  to  rent  the  same  to  the 
City  of  Chicago  and  repair  and  renew  them,  for  50  cents  apiece  per  year.  The  city 
accepted  the  offer,  and  took  1,557  such  sets  for  the  Police,  Fire  and  Street  depart- 
ments, at  this  rate,  and  would  have  probably  continued  to  act  on  this  contract 
had  not  the  ordinance  of  November  6,  1907,  given  the  City,  in  return  for  the 
franchise,  the  right  to  use  the  transmitter  and  receiver  free  of  charge.  In  the 
absence  of  any  access  to  the  books  of  the  Western  Electric  Company,  it  must 
be  assumed  that  the  contract  with  the  City  by  the  Chicago  Telephone  Company 
was  not  a  losing  one.  It  would  indeed  be  fair  to  assume  that  if  the  company  could 
afford  to  make  a  50  cent  price  in  competition  with  other  companies  for  the  small 
number  needed  by  the  City  departments,  it  could  afford  to  make  a  still  lower  price 
to  'the  Chicago  Telephone  Company  for  the  vastly  larger  number  needed  by  the 
latter. 

2.  PATENTS: 

The  Chicago  Telephone  Company  does  not  appear  to  buy  patents  as  such,  but 
to  buy  from  the  Western  Electric  Company  goods  many  of  which  are  patented. 
Since  most  of  the  goods,  however,  have  been  sold  of  late  on  substantially  the  same 
terms  to  independent  telephone  companies,  the  question  at  issue  relates  only  to  the 
few  patented  articles  which  the  Western  Electric  Company  refuses  to  sell  to  other 
than  the  Bell  companies.  The  only  one  of  these  patented  articles  upon  which  the 
Chicago  Telephone  Company  lays  any  stress,  is  the  so-called  Pupin  coil,  invented 
by  Prof.  Pupin  of  Columbia  University,  New  York  City,  about  twelve  years  ago. 
Its  purpose  is  to  reinforce  the  electric  current  at  various  points  along  the  telephone 
line  so  that  a  small  wire  will  carry  the  sound  as  distinctly  as  a  larger  and  therefore 
more  expensive  wire  would  otherwise  do.  Its  chief  use  is  on  long  distance  lines. 
In- Chicago  it  is  only  used  on  some  of  the  connecting  trunk  lines  from  one  central 
office  to  another  when  the  latter  is  over  nine  miles  distant.  Figures  have  been 


presented  by  the  Chicago  Telephone  Company  to  prove  that  even  on  these  lines 
the  Pupin  coils  have  saved  an  investment  of  $2,000,000  worth  of  copper  wire,  whose 
yearly  value,  on  a  7%  basis,  with  an  allowance  of  1%%  depreciation,  is  $170,000 
a  year. 

There  is,  however,  another  side  to  this  question.  It  is  not  only  what  these 
patents  may  be  worth  to  the  local  company,  but  their  cost  to  the  parent  company. 
Especially  is  this  important  when  the  parent  company  absolutely  owns  and  controls 
the  policies  of  the  local  company,  and  all  bargains  which  it  may  make.  Now,  the 
A.  T.  &  T.,  in  its  Annual  Keports  up  to  and  including  those  for  1907,  gave  a  yearly 
statement  of  the  value  of  all  its  patents.  It  is  to  be  regretted  that  this  policy  of 
publicity  was  not  continued.  However,  since  the  Pupin  coil  was  patented  about 
1900,  and  since  no  important  patents  since  1907  have  been  emphasized  as 
defenses  for  the  payments  by  the  local  companies,  the  Balance  Sheet  of  the  A.  T. 
&  T.  for  January  ],  1908,  may  be  quoted  as  very  significant.  According  to  that 
report  the  entire  value  of  all  the  patents  owned  by  the  A.  T.  &  T.  at  the  close  of 
1907,  was  given  to  the  stockholders  as  only  $277,937.35.  Since  the  total  number  of 
telephones  belonging  to  the  Bell  companies  in  the  United  States  at  that  time  was 
.'5,035,533,  the  value  of  these  patents  per  telephone  was  only  9  cents,  and  the  entire 
capital  value  to  be  apportioned  to  Chicago,  on  the  basis  of  the  202,600  stations  then 
in  service  by  the  local  company,  was  less  than  $20,000.  To  be  sure,  the  smaller 
companies  have  less  use  for  the  Pupin  coil  than  has  Chicago,  but  by  far  the 
greatest  use  is  on  the  long  distance  lines. 

3.     ENGINEERING,  ACCOUNTING  AND  LEGAL  SERVICES: 

The  company  undoubtedly  receives  some  benefit  from  the  parent  company  in 
these  ways.  Whether  the  latter  does  not  receive  a  sufficient  reward  in  the 
dividends  on  the  majority  of  the  stock  owned  by  it,  in  every  local  company,  is 
another  question. 

As  regards  all  three  of  the  above  lines  of  service  from  the  national  company, 
it  may  be  said  that  the  reports  of  this  company  to  the  Massachusetts  Highway 
Coin 711  ission,  indicate  a  very  large  profit  from  the  aid  given  in  the  above  ways  to 
the  local  companies. 

The  41/&%  payment  to  the  A.  T.  &  T.  yielded  in  1911  for  business  within  the 
city  $445,550.  This  was  $1.76  for  each  of  the  253,753  'phones  in  use  on  the  average 
last  year.  Of  this  $1.76  per  'phone,  the  amount  justly  earned  by  the  A.  T.  &  T. 
does  not  appear  to  be  over  $1  made  up  as  follows: 

TABLE   3. 

RENTALS  TO  AMERICAN  TELEPHONE  AND  TELEGRAPH  COMPANY. 

Rental  of  transmitter,  receiver  and  induction  coil $0.50 

Interest,    depreciation,   taxes,   royalties,   etc.,   on   patents,   estimated    at   22% 

of  the  cost — 9  cents  per   'phone — of  said  patents,  as  above 02 

Services  and  unknown  or  undervalued  items,  not  over 48 


Total  reasonable  payment $1.00 

Amount  of  excess  payment  per  'phone 76 

Amount  of  excess  payment,  total $192,837.00 

Per  cent,  of  said   excess  payment  to  the  present  conceded  value  of   all  the 

telephone  property  in  the  city,  of  $25,495,036 -.76% 

There  may  be  a  legal  question  as  to  the  power  of  the  city  to  reduce  this  pay- 
ment directly,  but  that  these  considerations  should  have  some  bearing  on  the  fixing 
of  rates,  which  in  the  end  inure  to  the  benefit  of  the  A.  T.  &  T.  now  owner  of  over 
95%  of  the  stock,  is  clear. 


18 


Maintenance  and  Depreciation  Reserve. 

The  final  element  in  operating  expenses  centers  around  the  effort  to  keep  the 
original  value  of  the  property  intact. 

Before  we  can  consider  a  fair  return  on  the  cash  put  into  a  property  by  the 
stockholders  and  bondholders,  we  must  assume  that  the  principal  of  the  investment 
has  not  depreciated  in  value.  Otherwise  the  investor  will  have  the  right  to  demand 
in  his  turn  not  only  a  fair  profit,  but  insurance  against  loss  of  the  original 
investment. 

Now  a  telephone  company,  like  other  municipal  utilities,  has  to  face  a  tend- 
ency to  the  decline  in  value  of  its  property  from  four  causes,  viz.,  physical  decay, 
inadequacy,  obsolescence,  and  municipal  requirements.  A  word  may  be  said  with 
regard  to  each. 

1.  Physical  decay  or  wear  and  tear:     All  material  things  wear  out  in  time, 
or  are  liable  to  destruction  by  accident.     Eepairs  must  be  constantly  made,  and  in 
time  the  plant  must  be  renewed  or  replaced. 

2.  Inadequacy:     The  development  of  the  business  of  a  telephone  plant  often 
requires  the  substitution  of  larger  switchboards,  underground   cables   with   more 
wires,  etc. 

3.  Obsolescence:      Invention    frequently   leads    to    the    substitution    of    new 
plant  for  old.     For  example,  we  no  longer  are  content  with  the  ringing  of  a  bell 
in  order  to  secure  the  attention  of  "Central,"  but  seek  immediate  attention  by  the 
mere  removal  of  the  receiver  from  the  hook.     New  types  of  cable  and  duct  are 
introduced  from  time  to  time. 

4.  Municipal  requirements:     Cities  more  and  more  require  the  burial  of  wires 
in  expensive  conduits,  and  sometimes  require  the  re-location  of  the  conduits  them- 
selves to  make  room  for  subways,  etc. 

All  four  forms  of  decline  in  value  have  been  encountered  here.  Three  lines 
of  expense  have  been  incurred  to  meet  them, — repairs,  reconstruction  and  deprecia- 
tion reserves.  The  first  two,  repairs  and  reconstruction,  or  renewals,  are  often 
classed  together  under  the  name  of  maintenance.  They  alone  represent  actual 
expenditures,  directly  designed  to  keep  the  plant  intact.  The  Chicago  Telephone 
Company,  however,  has  accumulated  a  reserve  to  meet  extraordinary  requirements 
and  such  depreciation  from  inadequacy  and  obsolescence  as  in  a  rapidly  growing 
plant  might  not  be  fully  met  from  the  maintenance  account. 

Postponing  for  the  moment  any  other  method  of  meeting  depreciation,  atten- 
tion should  be  called  first  to  the  amount  the  company  has  actually  expended  for 
repairs  and  reconstruction,  during  the  last  20  years. 

Until  1904  the  company  carried  all  its  expenditures  to  meet  these  various 
forms  of  depreciation  in  one  account,  known  as  the  maintenance  account.  In 
1904  two  divisions  were  made, — that  of  "repairs,"  and  that  of  "reconstruction 
and  renewal."  In  January,  1910,  a  third  division  was  created,  known  as  "station 
removals  and  changes."  This  account  had  previously  been  carried  in  the  main- 
tenance account.  The  present  system  of  accounts  is  much  better.  A  large  part  of 
the  expense  of  change  and  removal  of  the  telephone  transmitter,  receiver  and 
house  wiring  is  not  an  expense  of  repair  or  renewal,  but  a  mere  removal,  or 
change  of  location.  The  estimate  of  the  accountants  (Hall's  Report,  pages  23-24) 
relative  to  the  amount  of  repairs  and  reconstruction  follows  in  the  table  below: 

It  gives  the  average  investment,  except  land,  working  capital,  furniture, 
fixtures,  tools,  vehicles  and  construction  in  process,  as  found  by  Hall,  and  the 
actual  expenditures  for  repairs  and  renewals  since  1890.  The  average  investment 
is  found  by  adding  to  the  investment  of  January  1st  of  each  year,  half  of  the 
additions  of  the  year. 


19 

TABLE   4. 

AVEEAGE    INVESTMENT    IN    DEPRECIABLE    PROPERTY    AND    ACTUAL 

EXPENDITURES  FOR   THE   MAINTENANCE   AND   RENEWAL 

OF  THE   SAME,    1891-1911. 


Year. 

Average 
Depreciable 
Investment. 

Percentage  of 
Repairs  and 
Repairs  and             Reconstruction  to 
Reconstruction,     average  investment 

1891 

$  1,901,859.40 

$    200,304.50 

10.53% 

1892 

2,580,278.78 

255,014.45 

9.88 

1893 

3,322,833.13 

276,627.40 

8.33 

1894 

3,730,321.71 

352,082.68 

9.44 

1895 

4,010,432.25 

435,669.12 

10.86 

1896 

4,363,523.12 

413,886.99 

9.49 

1897 

4,703,850.31 

355,453.96 

7.55 

1898 

5,177,723.69 

452,645.93 

8.74 

1899 

6,171,416.78 

515,218.40 

8.35 

1900 

7,651,999.46 

883,761.27 

11.55 

1901 

9,560,846.96 

816,851.97 

8.54 

1902 

11,981,429.11 

1,025,846.49 

8.56 

1903 

14,312,487.60 

1,272,578.20 

8.89 

1904 

15,909,051.27 

1,102,970.74 

6.93 

1905 

17,304,637.09 

1,560,822.09 

9.01 

1906 

19,785,525.00 

1,435,440.69 

7.26 

1907 

23,549,541.08 

2,311,304.05 

9.81 

1908 

26,293,430.46 

2,271,707.11 

8.64 

1909 

27,754,261.76 

2,336,507.47 

8.42 

1910 

29,854,483.44 

2,323,353.78 

7.78 

1911 

33,277,902.01 

2,313,597.12 

6.95 

1912* 

37,350,508.47 

2,759,830.68 

7.39 

*Based  on  the  first  six  months — January  1 — June  30,  which  showed  a  net  in- 
crease of  construction  of  $1,925,052.31,  which  should  be  added  to  the  depreciable 
property  December  3,  1911,  of  $35,425,456.16.  The  current  repairs  of  $1,401,933.94 
less  $365,053.60  station  removals,  leaves  $1,036,880.34.  To  this  should  be  added 
replacements  of  $343,035,  or  a  total  for  the  half  year  of  $1,379,915.  This  is  at 
the  rate  of  $2,759,830.68  for  the  year. 


Decline  in  Maintenance. 

While  there  have  been  frequent  fluctations  from  year  to  year  in  the  percentage 
of  actual  expenditures  for  repairs  and  renewals  to  the  investment  for  the  year, 
there  has  been,  on  the  whole,  a  steady  decline  in  this  percentage.  It  is  best  shown 
in  the  following  way: 

During  the  first  three  years  of  1891-1893,  inclusive,  the  total  expenditures  for 
maintenance  and  reconstruction  were  $731,949.35,  and  the  sum  of  the  average 
investments  of  the  three  years  was  $7,804,971.31.  The  percentage  was  9.38.  Then 
in  the  same  way  the  percentage  can  be  found  for  1892-1894,  inclusive,  1893-1895, 
inclusive,  etc.,  down  to  and  including  1910-1912,  inclusive.  In  the  same  way  a  five 
year  period  may  be  taken,  beginning  with  1891-1895,  inclusive,  following  with 
1892-1896,  inclusive,  etc.  Finally,  a  seven  year  period  may  be  taken,  beginning 
with  1891-1897,  inclusive,  etc.  The  results  are  here  tabulated: 


20 

TABLE   5. 

DECLINING    KATIO    OF    EEPAIRS    AND    RENEWALS    TO    AVERAGE    IN- 
VESTMENT BY  GROUPS  OF  YEARS. 

Last  Year       One-Year     Three- Year     Five-Year     Seven- Year 
of  Period.          Period.          Period.  Period.  Period. 


1891 

10.53 

1892 

9.88 

1893 

8.33 

9.38% 

1894 

9.44 

9.17 

1895 

10.86 

9.62 

9.78 

1896 

9.49 

9.93 

9.63 

1897 

7.55 

9.21 

9.11 

9.30 

1898 

8.74 

8.58 

9.14 

9.11 

1899 

3.35 

8.24 

8.90 

9.00 

1900 

11.55 

9.74 

9.34 

9.52 

1901 

8.54 

9.48 

9.09 

9.30 

1902 

8.56 

9.34 

9.11 

9.00 

1903 

8.89 

8.69 

9.09 

8.94 

1904 

6.93 

8.06 

8.59 

8.58 

1905 

9.01 

8.28 

8.37 

8.66 

1906 

7.26 

7.73 

8.07 

8.39 

1907 

9.81 

8.75 

8.46 

8.47 

1908 

8.64 

8.64 

8.44 

8.50 

1909 

8.42 

8.92 

8.65 

8.48 

1910 

7.78 

8.26 

8.39 

8.32 

1911 

6.95 

7.67 

8.21 

8.18 

1912 

7.39 

7.39 

7.77 

7.96 

The  large  jump  upward  in  1900  was  due  to  the  almost  revolutionary  changes 
incident  to  the  rapid  introduction  of  ten-party  lines  and  many  changes  in  switch- 
boards. 

A  smaller  impulse  appeared  in  1907-8,  with  the  discontinuance  of  ten  party 
lines  and  with  the  many  other  changes  that  attended  the  passage  of  the  present 
ordinance  in  1907. 

A  trend  line  has  been  drawn,  showing  the  general  tendency.  Its  prolongation 
to  1917  reveals  7.5%  in  1912  and  7.2%  in  1917,  or  an  average  of  7.35%  as  the 
probable  expenditure,  yearly  during  the  coming  five  years, — that  is,  the  average 
percentage  of  expenditures  for  maintenance  to  the  average  depreciable  investment. 
This  closely  approaches  the  average  of  7.39%  for  1912  and  for  the  three  years 
1910-12,  inclusive,  and  7.59%  for  the  four  years  1909-12,  inclusive.*  It  therefore 
seems  fair  to  assume  7.5%  as  a  conservative  percentage  for  maintenance  for  the 
next  five  years,  unless  the  causes  of  the  present  conditions  cease  to  operate,  or  are 
counter-balanced  by  other  influences. 


*Detailed  computations  for  four-year  period  are  omitted. 

In  his  annual  report,  January  18,  1899,  Mr.  John  M.  Clark,  the  then  president 
of  the  telephone  company,  anticipated  the  decline  in  maintenance,  when  he  wrote. 
' '  The  business  is  still  to  some  extent  in  the  experimental  stage,  but  it  is  confi- 
dently believed  that  that  stage  will  soon  be  passed,  and  that  when  the  various 
kinds  of  apparatus  which  are  required  shall  become  standard,  when  new  and 
expensive  switchboards  will  not  become  obsolete  within  two  or  three  years  from 
the  date  of  their  completion,  that  a  better  service  will  become  possible,  and  that 
lower  rates  may  prevail  in  the  interest  of  the  subscribers  and  in  fairness  to  the 
company. ' ' 

The  following  table  gives  the  separation  that  has  been  made  on  the  books  of 
the  company  between  repairs  and  reconstruction  since  the  attempt  was  made  to 
keep  them  separately  in  1904. 


21 


TABLE   6. 
EEPAIRS  AND  RECONSTRUCTION  SINCE  1903. 


Percentage  of 

Percentage  of  Re-  Reconstrue- 

Years.  Repairs.        pairs  to  Average     Reconstruction,     tion  to  Aver. 

Investment.  Investment. 


1904 

$  1,008,730.56 

6.34 

$   94,240.18 

0.59 

1905 

1,144,874.97 

6.61 

415,947.12 

2.40 

1906 

1,274,071.10 

6.44 

161,369.59 

.82 

1907 

1,796,855.29 

7.63 

514,448.76 

2.18 

1908 

1,306,415.07 

4.97 

965,292.04 

3.67 

1909 

1,421,313.66 

5.12 

915,193.81 

3.30 

1910 

1,769,706.64 

5.93 

553,647.14 

1.85 

1911 

1,815,292.40 

5.45 

498,304.72 

1.50 

$11,537,259.69 

5.96 

$4,118,443.36 

2.12 

1912* 

2,073,760.68 

5.55 

686,070.00 

1.84 

*Based  on  the  first  six  months. 

This  matter  of  increase  of  life  and  reduction  of  repair  and  renewal  charges  is 
so  important  that  further  discussion  of  the  subject  is  desirable. 

This  is  especially  true  in  consequence  of  the  elaborate  studies  that  have  been 
recently  made  by  the  company  to  show  the  probable  upward  trend  of  maintenance 
in  case  of  a  great  reduction  in  the  rate  of  growth  and  no  increase  in  the  length  of 
life  of  the  telephone  plant. 

It  should  be  noted,  however,  that  a  reduction  in  the  rate  of  growth  will  check 
that  large  source  of  present  maintenance  charges,  viz.,  the  necessity  of  tearing  out 
good  cables  and  switchboards  to  make  room  for  larger  ones. 

Inadequacy  in  the  telephone  business  is  an  important  cause  of  expenditure 
for  maintenance.  The  slower  the  growth,  the  fewer  would  be  the  100-pair  and 
300-pair  cables  pulled  out  to  make  room  for  600-pair  cables,  and  the  less  would 
central  stations  have  to  be  enlarged  and  rebuilt  to  make  room  for  more  switch- 
boards. 

Similar  Tendencies  in  St.  Louis. 

The  Bell  Telephone  Co.  of  Missouri  has  a  property  whose  present  physical 
value  in  St.  Louis  and  other  parts  of  Missouri,  has  recently  been  reported  by  the 
well  known  engineering  firm  of  Westinghouse,  Church,  Kerr  &  Co.,  as  about 
$7,000,000.  An  appraisal  by  these  engineers  and  a  report  by  the  accountants, 
Haskins  &  Sells,  was  made  on  March,  1911,  to  a  committee  of  the  Board  of 
Directors  of  the  Missouri  company.  It  is  shown  that  the  total  expenditures  for 
maintenance  and  renewals,  1901-10,  inclusive,  fell  from  an  average  of  7.71%  of 
the  A-alue  of  the  depreciable  property,  during  the  first  six  years,  to  5.65%  during 
the  last  four  years  of  the  ten  year  period.  Haskins  &  Sells  thus  discussed  the 
matter. 

"Throughout  the  ten-year  period  the  annual  average  has  amounted  to  6.46 
per  cent,  of  the  value  of  the  depreciable  property  and  24.61  per  cent,  of  the  gross 
earnings.  The  decrease  during  recent  years  in  the  relative  amount  of  these 
expenditures  is  the  natural  consequence  of  the  improvement  in  the  character  of 
construction  which  has  taken  place  within  the  last  ten  years,  such  as  the  use 
of  conduits,  installation  of  cables — underground  and  aerial — and  the  increased 
stability  of  the  art  of  telephony. ' ' 

Changes  in  the  Art. 

A  review  of  the  development  of  the  company  indicates  that  far  greater  and 
more  revolutionary  changes  have  taken  place  in  the  past  than  are  likely  to  occur 
in  the  future.  Switchboards  and  subscribers'  stations  may  change,  but  conduits 


22 

and  cables  have  come  to  stay.     The  repair  of  all  classes  of  telephone  property  is 
admittedly  less  expensive  than  formerly.     Some  illustrations  will  make  this  clear: 

AERIAL  CONSTRUCTION: 

All  telephone  transmission  prior  to  1884,  was  upon  poles,  in  the  outlying  dis- 
tricts of  the  city,  and  on  the  housetops  in  the  business  districts.  Later  all  wiring 
was  placed  underground. 

These  changes  were  brought  about  not  only  by  the  requirements  of  the  city 
ordinances,  but  also  by  the  discovery  by  the  company  that  with  improved  methods 
of  burying  the  wires,  and  the  ability  to  place  several  hundred  pairs  of  wires  in  a 
single  duct  and  with  the  avoidance  of  injury  from  sleet  storms,  mischief-makers 
and  other  troubles,  conduits  were  cheaper  in  the  city  than  pole  lines.  Even  the 
wires  that  do  remain  upon  poles  within  the  city,  are  mostly  not  part  of  the  original 
pole  lines,  but  are  short  stretches  in  alleys. 

The  change  has  been  less  rapid  in  the  suburbs,  yet  in  the  territory  as  a  whole 
the  percentage  of  open  wire  on  poles  declined  from  84%  of  the  total  wire  in  use 
in  1885  to  8%  in  1911.  Within  the  city  less  than  one  per  cent,  of  the  mileage  is 
open  wire. 

CONDUITS: 

The  original  conduit  installation,  of  any  magnitude,  was  in  1884.  The  history 
since  then  may  be  divided  into  seven  chapters: 

1.  The  original  installation  of  the  so-called  Dorsett  conduit,  a  6"  compound 
duct.    It  was  in  3-foot  lengths,  and  made  of  a  composition  of  tar,  sand  and  cement. 
It  was  divided  into  two  halves  by  a  horizontal  shelf  partition  or  covering.     Man- 
holes, consisting  of  a  cylinder  four  feet  in  diameter,  with  a  bell-shaped  top,  were 
built  of  the  same  material,  and  located  along  the  line  of  the  conduit,  300  or  400 
feet  apart. 

2.  The  Brooks  conduit,  in  1886,  of  steel  pipe  from  2"  to  4"  in  diameter,  with 
splicing  boxes  at  various  intervals,  in  the  form  of  a  ball. 

3.  A  square  trough,  about  one  foot  on  each  side  and  about  half  filled  with 
sand  and  cement. 

4.  A  vitrified  tile  duct,  in  1889  and  1890,  3  feet  long  and  10"  square,  with  a 
horizontal  dividing  shelf,  known  ordinarily  as  10"xlO".    This  conduit  was  laid  in  a 
rough  support  at  the  joints  upon  bricks,  the  joints  being  covered  by  a  cemented 
burlap  bandage.     Brick  manholes,  generally  square,  were  constructed;  some  small 
concrete  vaults  were  also  built.    These  are  the  first  conduits  of  which  any  sections 
remain.    At  the  close  of  1888,  3,127  miles  of  wire  had  been  laid  underground. 

5.  Cement  lined  iron  pipes,  consisting  of  a  3"  tube  of  stovepipe  sheet  iron, 
lined   with   cement,   was   the   next   improvement   after    1892.      At   the   same   time 
creosoted  wooden  pump  log,  resembling  but  inferior  in  various  points  to  a  some- 
what similar  construction  today,  was  also  introduced  at  this  time. 

6.  In  1896  the  10x10  single  duct  vitrified  tile,  known  as  camp  tile,  came  into 
use.     The  duct  was  surrounded  by  a  concrete  envelope. 

7.  In  1900,  the  McRoy  or  Multiple  duct,  likewise  a  vitrified  clay  product  was 
introduced,  and  later  it  came  into  general  use.     For  several  years  it  has  been  the 
standard  duct,  and  little  improvement  is  considered  likely. 

METHODS  OF  INSTALLATION  OF  WIRES  AND  CONDUITS: 

1.  The  Dorsett  conduit  above  described  contained  one,  two  and  sometimes 
three  small  cables.  For  an  outside  protection  the  whole  was  wound  with  hemp, 
which  was  impregnated  with  an  asphaltum  mixture. 

After  the  cables  were  pulled  into  both  the  Dorsett  and  the  Brooks  conduits, 
from  1884  to  1888,  the  entire  conduit  was  filled  with  oil.  The  cable  itself  was' 
boiled  in  kettles  of  hot  oil.  These  kettles,  with  the  necessary  fuel  for  heating, 
were  carried  from  place  to  place. 

After  the  cable  was  installed,  in  this  expensive  and  difficult  manner,  no 
access  could  be  had  without  excavation.  There  was  a  great  objection  among  the 
people  and  the  city  authorities  to  the  smoke  and  stench  coming  from  the  oil.  It 


23 

was  with  great  difficulty  that  the  men  were  permitted  to  do  the  work  except  on 
Sundays  or  at  night. 

2.  About  1888,  a  lead  pipe  armor,  or  protection  of  the  hemp  and  tar  compound 
both  for  aerial  and  underground  cables,  was  introduced.  The  cables,  with  their 
wires  insulated  with  cotton  were  drawn  by  hand  through  50  to  100  feet  sections 
of  these  lead  pipes.  The  sections  were  then  soldered  together  by  a  plumber,  and 
the  entire  cable  subjected  to  heat,  filled  with  hot  paraffin,  sealed,  wound  on  a  reel 
and  made  ready  for  shipment. 

CABLES: 

While  revolutionary  changes  were  taking  place  in  the  poles,  conduits  and 
wires,  an  equally  important  change  was  taking  place  in  the  grouping  of  wires  into 
cables  for  installation  upon  pole  lines,  or  to  a  vastly  larger  extent,  for  insertion  in 
conduits. 

1.  Cables  of  twenty  No.  18  gauge  rubber-covered,  untwisted  wires,  introduced 
in  1884,  in  the  Dorsett  circuit  already  described. 

2.  Cotton  insulated,   straight  wires,  pulled  into  the  Brooks  circuit   of  wire 
pipe,  1886,  filled  with  hot  oil,  as  already  described. 

3.  The  introduction  of  a  lead  pipe  covering,  in   1888,   to  protect  the  wires 
against  moisture  and  other  damage,  in  both  aerial  and  underground  cables.     Un- 
twisted cotton  insulated  wires  were  wound  with  string  into  a  tight  cable,  and  then 
pulled  into  the  lead  pipe,  which  was  then  filled  with  hot  paraffin.     The  cable  was 
exceedingly  noisy,  and  not  at  all  practicable.    The  pulling  of  these  cotton  insulated 
wires  by  hand,  sometimes  90  pairs  at  a  time,  into  50  or  100  feet  sections  of  lead 
pipe  at  the  factory,  before  insertion  of  the  hot  paraffin,  was  a  tedious  job. 

4.  Twisted  pair  cables  appeared  in  1892,  and  were  the  next  improvement.    But 
the  cables  were  solid  and  inaccessible,  the  location  and  removal  of  trouble  was 
unsatisfactory  and  expensive. 

5.  The  present  day  type  of  paper  insulated,  twisted  pair  cables  was  developed 
between  1892  and  1895. 

6.  Increase  in  the  number  of  pairs  possible  in  a  cable  and  therefore  in  the 
duct  of  a  conduit.     The  increase  was  from  90  pairs  in  the  80 's  to  120  pairs  of  No. 
19  cable  in   1892,  400  pairs  of  No.  22  gauge  cable  in  1900  and  600  pairs  of  the 
same  cable  in  1904. 

7.  Loading  coils,  in  1906  and  1907,  and  the  installation  of  special  toll  cables  of 
large  gauge  conductors,  were  some  of  the  most  recent  steps  in  the  evolution  to  the 
present  type  of  cable,  which,  like  the  type  of  wire  and  of  conduit,  appears  to  have 
reached  a  point  of  slow  advance  instead  of  the  progress  by  leaps  and  bounds  that 
had  been  going  on  up  to  about  five  years  ago. 

CENTRAL  OFFICE  SWITCHBOARDS: 

1.  The  telegraphic  switchboard,  adapted  for  telephone  use.     In  this  board,  in 
1880,  the  telephone  operator  at  Central  received  the  call  for  a  subscriber  on  a  tape 
register.     He  would  then  connect  his  telephone  with  the  subscriber's  line  and  ask 
what  was  wanted.     The  whole  process  was  tedious. 

2.  The  subscriber  was  given  a  means  of  signalling  the  operator  direct  on  the 
same  wires  that  he  talked  over. 

3.  The  multiple  switchboard  was  invented  in  the  later  80 's,  and  one  of  the 
largest  of  its  kind,  at  the  time,  was  installed  in  Chicago. 

4.  The  so-called  "Express"  board,  invented  about  1894,  partly  displaced  this 
magneto  board.     Lamp  signals  took  the  place  of  drops,  and  the  so-called  Fuller 
battery,  at  the  subscribers'  instrument,  was  replaced  by  a  storage  battery.     The 
subscriber  could  now  signal  the  operator  by  merely  removing  the  telephone  trans- 
mitter from  the  hook,  instead  of  turning  the  crank,  as  in  the  magneto  system. 

5.  The  present  type  of  relay  common  battery  switchboard  was  invented  about 
1898,  but  so  many  improvements  were  subsequently  made,  up  to  about  five  years 
ago,  that  it  has  been  necessary  to  reconstruct  most  of  the  earlier  switchboards  of 
this  type. 

These  various  improvements  reduced  the  average  time  necessary  for  making 
connection  for  calls,  according  to  President  Sunny,  from  90  seconds  in  1886  to  18 
seconds  in  1908.  This  has,  of  course,  been  accompanied  with  a  large  reduction  of 
expense  of  the  operator's  time  in  handling  messages. 


24 

If  the  semi-mechanical  system  now  in  operation  in  the  big  laboratory  building 
of  the  A.  T.  &  T.  and  of  the  Western  Electric  in  New  York  shall  prove  the  success 
it  promises,  it  will  be  used  for  new  central  stations  and  will  justify  its  introduction 
by  the  large  decline  it  will  effect  in  the  number  of  operators  and  in  other  costs. 
WIRE: 

1.  Iron  Wire.    Prior  to  1890  practically  all  the  wire  used  in  the  outside  plant 
was  No.  12  iron. 

2.  Copper  Wire.     About  1890,  when  15,000  miles  of  wire  were  in  use,  copper 
wire  began  to  supercede  iron  wire,  although  there  was  a  short  interval  in  which 
trial  was  made  of  some  phosphor  bronze  wire. 

3.  About   1892,   owing  to   the   interference   of   the   high   voltage   of   electric 
railways  and  lighting  plants,  the  telephone  company  began  to  change  its  single 
wire  copper  lines  to  2-wire  metallic  circuits.     Each  of  the  above  transformations, 
from  iron  to  a  single  copper  wire,  and  then  to  a  2-wire  circuit  involved  a  complete 
transformation  of  the  wire  system. 

The  telephone  ordinance  compels  the  Company  to  place  and  keep  in  under- 
ground conduits  all  its  wires  from  the  Chicago  Kiver  on  the  North  to  Twelfth 
street  on  the  South,  and  from  Lake  Michigan  on  the  East  to  the  South  branch  of 
the  Chicago  Eiver  on  the  West,  while  in  nearly  all  the  rest  of  the  city  it  must 
place  all  its  wires  underground,  with  the  exception  of  wires  not  to  exceed  two 
blocks  in  length  from  underground  connections  to  subscribers  stations.  Even 
these  wires  cannot  be  placed  on  poles  on  streets  if  there  are  alleys. 

In  a  general  way  it  may  be  said  that  the  Chicago  Telephone  Company  can 
only  use  pole  lines  North  of  Howard  avenue,  West  of  Western  avenue  and  Fortieth 
avenue,  and  South  of  Seventy-ninth  street.  The  exact  boundaries  are  to  be  found 
in  Paragraph  10  of  the  Ordinance  of  1907. 

Proportion  of  Property  of  Long  Lived  Construction. 

At  the  close  of  1895  only  50%  of  the  wires  in  the  Chicago  telephone  territory, 
city  and  suburban,  were  underground.  At  the  close  of  1905,  64%  were  under 
ground,  and  at  the  close  of  1911,  81%  were  under  ground. 

So  great,  however,  has  been  the  reduction  in  the  cost  of  construction  per  foot 
of  conduits  and  cables  that  the  proportion  of  the  entire  investment  in  land,  build- 
ings, right  of  way,  and  under  ground  construction,  exclusive  of  toll  properties 
whose  data  is  not  fully  available,  has  only  increased  throughout  the  Chicago 
telephone  territory  from"  37.6%  of  the  total,  in  1891,  to  40.1%  in  1911,  and  in  the 
city  the  increase  has  been  from  39%  to  43.9%.  These  figures  are  readily  computed 
from  the  data  given  in  Mr.  Hall's  Exhibits  B,  C  and  D. 

The  life,  however,  of  both  conduits  and  cables  has  itself  so  much  increased 
that  the  real  average  life  has  undoubtedly  increased  much  more  than  is  indicated 
by  the  above  figures.  The  cost  of  repairs,  as  already  remarked,  has  undoubtedly 
declined  with  the  growth  in  the  art.  This  view  is  confirmed  by  President  Vail,  of 
the  A.  T.  &.  T.  in  his  report  for  1910.  (Page  7.) : 

' '  The  present  policy  of  the  Bell  System  is  to  provide  against  every  probable 
contingency  and  to  base  the  amount  and  extent  of  such  provision  on  past  experi- 
ence— not  on  future  expectations.  It  is  conjectured  that  the  future  will  show  a 
decrease  in  the  depreciation  or  reconstruction,  due  to  decay,  wear  and  tear,  and 
obsolescence.  Changes — improvements — are  going  on  as  rapidly  as  in  the  past, 
but  the  general  character  of  plant  and  methods  is  assuming  more  permanency. 
The  improvements  are  being  evolved  from  and  are  being  grafted  on  to  the  old 
system  and  methods.  The  disturbing  and  sometimes  seemingly  destructive  condi- 
tions following  the  rapid  development  of  high  pressure  power  and  transmission 
have  been  to  a  great  measure  overcome. 

"All  this  has  been  made  possible  through  the  unremitting  study  and  research 
of  the  staff  of  the  Engineering  and  Experimental  Departments  of  the  Company, 
who,  by  close  attention,  observation  and  study,  anticipate  and  provide  for  all 
such  contingencies  and  conditions  as  can  possibly  be  anticipated  or  provided  for 
in  advance. 


25 

' '  Under  these  conditions  there  is  small  probability  that  any  such  causes  as 
those  which  forced  the  wholesale  reconstruction  or  rearrangement  of  plant  in 
the  past  will  again  occur;  it  is,  however,  for  the  benefit  of  the  public  and  of 
the  corporation  to  have  an  ample  reserve  for  any  contingency  which  may  happen. ' ' 

The  Company's  Depreciation  Reserve. 

The  Chicago  Telephone  Company  has  collected  from  the  subscriber  and  set 
aside  as  a  depreciation  reserve,  a  further  sum  of  $5,091,823.19  to  meet  depreciation 
that  may  be  revealed  at  some  time  in  the  future.  Of  this  fund  about  $2,241,141 
was  set  aside  in  1910  and  1911.  This  depreciation,  assumed  to  exist  after  all 
current  expenditures  for  repairs  and  renewals  may  be  called  residual  depreciation. 
The  property  of  the  company  on  January  1,  1912,  had  been  built  up  from  the  fol- 
lowing sources: 

First  mortgage   5%   bonds $  5,000,000.00 

Loans  by  banks 1 ,000,000.00 

(  iipitnl  'stock    27,000,000.00 


$33,000,000.00 

Depreciation    reserve $  5,091,823.19 

Insurance  fund  307,548.21 

Other  reserves    244,735.49 


5,644,106.89 
$38,644,106.89 


In  addition  to  the  above,  current  assets  of  cash,  bills,  accounts,  receivable  and 
prepaid  expenses  amounted  to  $1,690,067.42  but  these  were  balanced  by  current 
liabilities  of  accounts  payable  and  accrued  liabilities  not  due,  amounting  to 
$1,886,285.34.  Leaving  out  of  account  these  latter  items  of  current  assets  and 
current  liabilities,  which  virtually  offset  each  other,  there  remains  as  just  stated 
two  chief  sources  of  the  property  of  the  Telephone  Company,  to  wit:  $33,000,000 
furnished  by  the  stock  and  bond  holders  and  banks,  and  about  $5,650,000  supplied 
by  the  telephone  users,  in  order  to  keep  the  investment  of  the  stock  and  bond- 
holders intact. 

The  question  will  later  arise  whether  the  $27,000,000  supplied  by  the  stock- 
holders came  in  part  from  earnings  in  addition  to  large  dividends,  but  that  problem 
does  not  arise  at  this  point. 

The  depreciation  reserve  above  referred  to  is  not  the  only  amount  that  the 
company  set  up  in  the  past  as  representing  depreciation.  From  1894  until  1907 
the  company,  after  distributing  dividends  of  10%,  had  charged  to  operations 
$3,767,233.55,  which  was  written  off  the  plant  account.  Early  in  1908  the  company 
appears  to  have  concluded  that  the  property  had  not  depreciated  to  any  such  extent. 
The  whole  of  this  $3,767,233.55  was  transferred  to  surplus,  leaving  the  plant 
account  as  it  would  have  been  without  any  such  deduction.  This  credit  to  surplus 
formed  the  basis  of  the  stock  dividend  of  $4,500,000  in  that  year.  Not  only  was 
the  above  amount  of  $3,767,233.55  charged  to  operations  and  maintenance,  but  an 
additional  amount  of  $1,575,000  was  charged  during  the  above  period  as  mainten- 
ance, which  likewise  eventually  found  its  way  into  the  surplus.  (Hall,  page  20.) 
The  total  amount  thus  included  in  operations,  purporting  to  represent  a  provision 
for  depreciation,  or  for  deferred  maintenance,  but  which  was  diverted  to  the  benefit 
of  the  stockholders,  was  therefore  $5,342,233.55.  The  dividends  were  indeed 
reduced  in  1908  from  10%  to  8%,  so  that  the  total  dividends  were  not  materially 
changed.  But  in  so  far  as  an  8%  dividend  is  less  subject  to  public  criticism  and 
less  liable  to  reduction  in  a  change  of  rates  than  is  a  10%  dividend,  the  stock- 
holders gained. 

Tn  another  way,  they  also  gained.  By  writing  up  the  plant  investment  several 
million  dollars,  the  justification  for  the  increase  of  stock  and  for  a  profitable  return 
thereon,  was  given  to  the  public. 


26 

The  important  feature  of  the  transaction  was  the  revelation  that  the  company 
considered  that  there  had  been  less  depreciation  by  $4,845,000,  than  the  books 
have  hitherto  shown.  Consequently  the  telephone  users,  in  paying  such  charges  as 
to  permit  the  accumulation  of  that  fund,  in  reality  had  not  been  accumulating  a 
fund  with  which  to  meet  depreciation,  but  had  been  increasing  the  profits  of  the 
company,  which  the  latter  had  invested  as  surplus  in  extensions  and  then  capital- 
ized. 

Naturally,  such  a  transaction  makes  one  a  little  critical  with  regard  to  the 
new  accumulation  of  $4,971,823.19  in  one  depreciation  account  and  of  $120,000  in 
another. 

The  Appraisal. 

At  this  point  the  appraisal  made  for  the  Company  by  Byllesby  &  Arnold 
becomes  of  vital  importance.  Does  this  appraisal,  made  with  great  care  and 
regardless  of  expense,  show  that  enough  has  been  collected  from  the  subscriber  to 
keep  intact  the  investment  by  the  stock  and  bond  holders,  of  approximately 
$33,000,000?  If  not,  then  the  investor  is  justified  in  calling  on  the  telephone  user 
for  a  larger  yearly  addition  to  the  depreciation  reserve.  On  the  other  hand,  if  the 
payments  by  the  subscriber  to  this  fund  have  more  than  kept  the  property  intact, 
a  smaller  contribution  may  henceforth  be  reasonably  made  by  the  public. 

In  approaching  this  appraisal,  however,  hasty  conclusions  must  not  be  drawn. 
An  attempt  must  be  made  to  correct  the  appraisal  where  it  is  found  to  be  in  error, 
even  if  in  so  doing,  the  value  of  the  property  may  be  reduced  and  the  need  for  a 
depreciation  reserve  be  thereby  increased.  In  the  long  run  the  public  will  gain  by 
a  complete  knowledge  of  the  situation,  and  will  not  desire  to  take  any  unfair 
advantage  of  the  appraisal. 

On  its  face  the  appraisal  would  indicate  that  not  only  had  the  actual  expendi- 
tures for  maintenance  kept  the  value  of  the  property  up  to  the  above  $33,000,000, 
but  the  appraisal  would  also  indicate  that  in  the  opinion  of  Byllesby  &  Arnold,  the 
property  was  worth  much  more  today  than  even  the  sum  of  this  $33,000,000  of 
investment  and  of  the  depreciation  reserve.  The  following  table  will  make  this 
clear. 

TABLE  7. 


APPEAISED   VALUE   NEW  AUGUST   1,   1911. 
PHYSICAL   PEOPEETY. 


Chicago 
Eeproduction 
Subject.  Value. 

Buildings     $  2,642,405.00 

Land     1,173,937.00 

Central   office    equipment 4,960,673.00 

Subscribers'   station   equipment..      6,409,151.00 

Exchange  lines    14,746,383.00 

Toll   lines    934,369.00 

Construction   in   process 1,392,861.00 

Office   furniture   and   fixtures....        245,151.00 

Tools    and    vehicles 273,426.00 

Supplies     660,288.00 

Working  capital   887,250.00 


Total $34,325,894.00 

Plant  development  expense $      564,636.00 

Total  physical  property 34,890,530.00 

Cost  of  developing  the  business.  .     4,753,993.00 


Suburban 
Eeproduction 

Value. 

$      320,498.00 

157,706.00 

747,298.00 

1,281,074.00 

5,388,296.00 

1,936,761.00 

196,340.00 

20,957.00 

99,222.00 

261,308.00 

162,750.00 

$10,572,210.00 

$      183,352.00 

10,755,562.00 

2,340,253.00 


Total 
Eeproduction 

Value. 

$  2,962,903.00 

1,331,643.00 

5,707,971.00 

7,690,225.00 

20,134,679.00 

2,871,130.00 

1,589,201.00 

266,108.00 

372,648.00 

921,596.00 

1,050,000.00 

$44,898,104.00 

$      747,988.00 

45,646,092.00 

7,094,246.00 


Total   property   and    business $39,644,523.00          $13,095,815.00         $52,740,338.00 


27 

Referring  to  the  totals  in  the  last  line,  before  deducting  the  depreciation, 
Byllesby  and  Arnold  write  (Appraisal  Vol.  1,  Page  24-25): 

' '  These  totals  represent  the  investment  of  the  Chicago  Telephone  Company 
in  its  property  and  its  attached  business  on  the  basis  outlined,  and  include  in 
addition  to  the  appraised  value  of  the  physical  property  and  the  development 
cost  of  such  property,  no  element  of  what  is  commonly  designated  as  "going 
concern ' '  value  other  than  that  represented  by  the  cost  of  establishing  the  busi- 
ness, which  cost  has  been  worked  out  on  the  definite,  conservative  premises  here- 
inabove  described." 

It  would  be  fortunate  indeed  for  the  city,  if  the  Chicago  Telephone  Company 
were  really  entitled,  in  this  rate  investigation,  to  this  value  new  of  $52,740,338 
or  even  to  the  present  value  of  $42,915,926  based  on  the  largest  amount  of  observed 
and  estimated  depreciation  which  the  appraisers  were  able  to  compute.  The  less 
the  depreciation  the  lower  need  be  the  rate  of  return  to  secure  a  fair  profit  on  the 
investment.  If  there  were  no  net  depreciation  whatever,  not  only  would  deprecia- 
tion charges  be  eliminated,  but  the  property  would  appear  so  much  safer  to  the 
average  investor,  that  he  would  furnish  money  for  needed  extensions,  at  a*  lower 
rate  of  return,  than  if  the  physical  property  every  year  bore  a  lower  and  lower 
proportion  to  the  outstanding  securities.  The  larger  the  physical  value  back  of 
stocks  and  bonds,  the  lower  the  rate  of  return,  other  things  being  equal,  that  will 
be  demanded  by  the  investor.  A  continual  rise,  for  example,  in  the  price  of  labor 
and  material,  would  increase  the  cost  of  construction  and  the  appraised  value  of 
the  property,  but  would  lessen  the  percentage  of  the  present  investment  that  would 
be  borne  by  the  old  investment  that  is  scrapped  from  time  to  time. 

It  seems  necessary,  however,  to  dissent  from  some  of  the  positions  taken  by 
Byllesby  and  Arnold,  and  consequently  to  differ  from  some  of  the  conclusions 
reached  by  them.  In  this  no  reflection  is  intended  upon  their  well  known  ability 
and  integrity  of  purpose. 

Copper. 

Among  the  doubtful  points  in  the  appraisal  may  be  mentioned  the  price  of 
copper  and  the  assumed  life  and  net  salvage  employed  by  the  appraisers.  Copper 
was  taken  at  16  cents  a  pound,  as  of  August  1,  1911.  The  following  table  gives  the 
average  yearly  price  for  each  of  the  19  years,  1893-1911,  inclusive,  as  taken  from 
the  Iron  Age  by  the  Chicago  Telephone  Company.  These  prices  are  a  little  lower 
than  those  given  in  the  Telephony  Directorv  of  the  telephone  industry,  1912  edition 
(page  333): 

TABLE  8. 

AVEEAGE  PEICE  OF  COPPEE. 


1893 10.817c 

1894 9.472e 

1895 10.693C 

1896..  ..10.964C 


1893-6 10.4S7C 

1897 10.250C 

1898 11.954c 

1899 17.729C 

1900 16.545C 

1901..  .. 


1902 11.626c 

1903 13.235C 

1904 12.823C 

1905 15.590C 

1906..  .  J9.278C 


1902-6 14.510C 

1907 20.004C 

1908 13.208C 

1909 12.982C 

1910 12.738C 

1911..  ..12.576C 


1897-1901 14.518C  1907-11 14.302c 

Average   for   1893-1901 12.726c 

Average   for   1902-1911 14.406c 


Average   for   1891-1911 13.610c 


28 


January,  1912 14.24c 

March,  1912 14.60c 

May,  1912 16.00c 

July,  1912 16.90c 

September,  1912 17.40c 

Average,  January  to  September.  .15. 82c 


The  above  table  would  indicate  that  16  cents  was  high.  The  company,  how- 
ever, has  established  an  elaborate  trend  curve  of  prices  of  copper  to  show  that 
16  cents  a  pound  is  in  line  with  the  trend  or  tendency  of  prices,  at  the  time  of 
the  appraisal.  Since  the  earliest  quotations  at  hand  beginning  in  1883,  coppei 
has  averaged  less  than  16  cents  every  year  save  in  1888,  1899-1901  inclusive,  and 
1905-1907  inclusive.  During  those  years  only  309,433  miles  of  wire  out  of  807,751 
in  use  at  the  close  of  1911,  or  38%  were  laid.  It  would  be  easy  to  show  that 
copper  had  not  from  the  beginning  averaged  over  15  cents  and  had  not  even  aver- 
aged that  during  any  period  of  five  or  more  years  preceding  the  appraisal.  At  the 
same  time  if  the  test  of  value  is  not  to  be  the  actual  cost  or  recent  costs,  but 
probable  costs  of  material  and  labor  during  the  next  five  years,  then  16  cents 
may  be  accepted  as  a  probable  price. 

Overhead. 

We  will  first  take  up  the  appraisal  of  the  property  new  and  later  consider 
the  depreciation. 

The  appraisers,  Byllesby  &  Arnold,  have  assumed  that  the  Telephone  Com- 
pany's property  and  business  are  not  in  existence,  but  are  to  be  constructed 
new.  After  an  exhaustive  inventory  of  the  principal  items  of  the  property,  they 
have  estimated  the  cost  of  materials,  tools  and  labor  required  to  reproduce  new 
each  item  in  place  as  of  date  August  1,  1911.  In  this  base  figure  were  included 
all  contractor's  charges,  which  would  embrace  his  costs,  his  profits  and  his  allow- 
ance for  contingencies.  No  general  contractor  was  assumed,  but  a*  contractor 
was  allowed  only  for  such  portions  of  the  work,  as  have  usually  been  put  in 
by  contract,  such  as  buildings  and  central  office  switchboards.  To  the  base  cost 
obtained  as  above,  a  percentage,  varying  with  the  different  classes  of  work,  was 
added  for  reorganization,  engineering  and  incidentals.  In  these  items  were 
included  general  office  expenses  in  securing  bids,  awarding  contracts,  making  out 
bills  of  material,  purchasing  materials,  legal  expenses  and  salaries  of  the  officials, 
whose  work  is  chargeable  to  construction.  Engineering  includes  preparation  of 
plans,  drawings  and  specifications,  and  the  expense  of  general  supervision  and 
inspection  in  the  carrying  out  of  the  plans  and  specifications.  Incidentals  include 
insurance  against  fire  and  accident,  and  all  general  expenses  lying  outside  of  the 
estimated  contract  cost;  such  as  small  changes  in  design.  They  might  be  included 
as  extras  on  the  contract  price. 

These  expenses  vary  from  5  to  15%  in  the  various  schedules,  aggregating 
12.19%.  In  case  of  land  only  5%  was  added,  which  was  intended  to  cover  selection 
of  site,  search  of  title,  purchase  fees  and  such  of  the  reorganization  and  incidental 
expenses  mentioned  above  as  were  applicable. 

After  adding  to  the  base  figures  the  above  allowance  of  11  to  12%  for  reor- 
ganization, engineering,  etc.,  a  further  percentage  of  about  7%  was  added  to 
cover  interest  and  taxes  during  construction,  and  other  so-called  carrying  charges 
and  cost  of  obtaining  money.  They  have  all  been  termed  brokerage.  This  was 
small  in  the  case  of  substation  equipment  tools  vehicles  and  supplies,  which,  it 
i*  assumed,  are  put  in  service  immediately  upon  purchase.  The  following  table 
summarizes  the  matter  of  overhead. 


29 

TABLE  9. 
SUMMAKY  OF  OVERHEAD. 

Percentage  City  and     Percentage 

Description.                                   City.  of  Base.  Suburban.  of  Base. 

*Base   figure    $26,762,224.69  100.00  $35,217,600.90  100.00 

Organization,  engineering,  etc.     3,263,204.34  12.19  4,468,147.48  12.68 

Total    of    above..! 30,025,429.23  112.19  39,685,748.38  112.68 

Brokerage     2,020,353.27  7.55  2,573,153.96  7.31 

Entire  value  new 32,045,782.50  ,       119.74  42,258,902.34  119.99 

Entire    overhead,    included    in 

above     5,283,557.81  19.74  7,041,301.44  19.99 

*Aside  from  construction  in  process  and  working  capital. 

If  the  value  of  this  plant  is  to  be  determined  by  what  it  would  cost  to  dupli- 
cate it, —  if  all  knowledge  of  the  present  location  of  the  conduits  and  central 
stations,  etc.,  were  suddenly  obliterated  from  the  mind  of  man, — then  this  allow- 
ance of  19.99%  for  overhead  on  top  of  contractor's  profits  on  each  portion  of 
the  work  is  no  higher  than  engineers  often  claim  in  such  appraisals. 

The  writer,  however,  has  always  contended  that  one  could  not  assume  such 
a  fanciful  theory  as  the  above,  but  must  assume  that  the  knowledge  now  possessed, 
and  indeed,  in  large  part  reduced  to  writing  in  the  inventory,  cannot  be  blotted 
out  of  men's  minds  even  for  the  purpose  of  an  appraisal 

The  Wisconsin  Eailroad  Commission  only  allows  12%  above  base  figures  and 
in  its  base  does  not  include  so  much  contract  work.  The  Massachusetts  Gas  and 
Electric  Light  Commission  will  have  nothing  of  this  theory  of  reproduction, 
but  sticks  to  the  historical  costs. 

All  of  the  installation  of  cables  and  much  of  the  subscribers  sub-station  and 
some  of  the  central  office  equipment  were  done  direct  by  the  Chicago  Telephone 
Company,  without  any  contractor  and  probably  with  less  than  15%  for  over- 
head instead  of  19.99%. 

As  for  brokerage,  of  which  the  chief  item  is  interest  during  construction, 
this  Chicago  company  has  always  earned  enough  to  pay  all  such  charges  and 
large  dividends  besides.  If  brokerage  had  been  charged  to  construction  in  the 
past,  operating  expenses  would  have  appeared  less  and  profits  greater.  A  greater 
reduction  of  the  rates  in  1907  might  then  have  been  secured.  The  company  hav- 
ing secured  the  benefits  of  charging  brokerage  to  operating  expenses  can  hardly 
put  the  charge  now  into  construction. 

If  the  overhead  allowed  by  the  appraisese  had  been  only  15%,  instead  of 
19.74%  in  the  city,  and  19.99%  in  the  entire  territory,  the  appraisal  new  would 
have  been  reduced  $1,268,696  in  the  city,  and  $1,757,684  in  the  entire  territory. 


Land. 

The  land  owned  by  the  company  in  the  city  and  suburbs,  cost  the  company, 
according  to  their  books,  $601,801.14.  Its  present  value  is  given  by  Byllesby  & 
Arnold  at  $1,331,642.60,  an  increase  of  $729,841.46  or  121%. 

In  the  following  table  is  given  the  book  value;  that  is,  the  cost  as  appearing 
on  the  books,  and  the  appraised  value,  after  the  addition  of  all  overhead  charges 
and  the  relation  between  the  cost  and  the  appraisal  for  each  piece  of  land  in 
the  city. 


30 


TABLE  10. 
LAND  APPEAISAL  AND  COST. 


Appraisal.     ] 

Book  Value. 

Austin   office    $ 

16,124.06 

$     9,200.00* 

Calumet    office     

61,425.00 

33,513.08 

Canal    office     

7,371.00 

6,000.00 

Central  Division   headquarters  .  .  . 

21,498.75 

17,539.75 

Cortland  street  lots  

2,457.00 

1,652.49 

Douglas  office  

19,751.99 

18,084.00 

Edgewater    

3,071.25 

2,000.00 

Harrison  street  lot  

257,985.00 

176,972.77 

Humboldt  office  

5,769.34 

4,200.00 

Hyde    Park    office  

6,142.50 

5,687.50 

Irving  Park   office  

6,081.08 

3,530.00 

Kedzie  office  

4,422.60 

3,120.00 

Lake  View  office  

4,422.60 

3,360.00 

Lawndale  office   

7,033.16 

4,000.00 

Lincoln  office   

5,307.12 

5,500.00 

Main  office   

462,723.58 

40,420.00 

Monroe  office   

24,692.85 

14,362.50 

North    office     

22,113.00 

21,525.00 

Northern    Division    headquarters. 

25,798.50 

14,448.35 

Oakland  office    

10,411.54 

10,500.00 

South  Chicago  headquarters'  

7,383.29 

7,175.00 

Southern  Division  headquarters.  . 

12,511.04 

7,000.00 

Wabash  office  - 

144,84.0.15 

96,026.17 

Wentworth   office    

7,371.00 

5,610.00 

West  office   

2,616.71 

4,090.00 

West  Pullman  office  

1,228.50 

1,000.00 

Western   Division    headquarters  .  . 

17,291.01 

10,550.00 

Yard  office   

6,093.36 

4,550.00 

Total $1,173,936.98     $531,656.61* 

*Given  in  the  appraisal  by  mistake  $4,700  less. 
fDecreases. 

TABLE  11. 


LAND  BASE  AND  OVEEHEAD. 


Increase        Per 
over          cent.  In- 
Book  Value,  crease. 


$  6,924.06 

75.3 

27,911.92 

83.3 

1,371.00 

22.8 

3,959.00 

22.6 

804.51 

48.7 

1,667.99 

9.2 

1,071.25 

53.6 

81,012.23 

45.8 

1,569.34 

37.4 

455.00 

8.0 

2,551.08 

72.3 

1,302.60 

41.8 

1,062.60 

31.6 

3,033.16 

75.8 

192.88f 

3.5 

422,303.58 

1044.8 

10,330.35 

71.9 

588.00 

2.7 

11,310.15 

78.1 

88.46f 

.8 

208.29 

2.9 

5,511.04 

78.8 

48,813.98 

50.8 

1,761.00 

31.4 

l,473.29f 

36.0 

228.50 

22.8 

6,741.01 

63.9 

1,543.36 

33.9 

$642,280.37     119.4 


Description.  City. 

Base  figure    $    955,585.65 

Eeorganization,  engineering,  &c.    47,779.28 

Total  of  above 1,003,364.93 

Brokerage    170,572.05 

Total  value   1,173,936.98 

Overhead  included  in  above..      218,351.33 


Percentage 
overhead 
to  base. 

5.00 
105.00 

17.85 

122.85 

22.85 


City  and 
Suburban. 

$  1,083,958.15 

54,197.91 

1,138,156.06 

193,486.54 

1,331,642.60 

247,684.45 


Percentage 
overhead 
to  base. 

5.00 
105.00 

17.85 

122.85 

22.85 


How  to  treat  the  increase  in  land  values,  in  a  rate  case  like  this,  has  been 
and  still  is  a  much  disputed  and  unsettled  question.  The  tendency  of  the  courts 
has  been  toward  the  recognition  of  this  increased  value.  Such  has  also  been 
the  practice  of  the  Wisconsin  Eailroad  Commission.  On  the  other  hand,  the 
Massachusetts  Gas  and  Electric  Light  Commission,  which  has,  by  far,  the  greatest 
age  and  prestige  of  any  of  our  commissions,  has  always  refused  to  recognize 
increase  in  the  regulation  rates.  It  is  held  that  only  on  the  sale  of  such  land 
can  the  company  divide  as  a  surplus  the  unearned  increment,  and  it  is  not  certain 
that  even  then  the  Massachusetts  Commission  would  not  compel  the  use  of  the 
proceeds  of  the  sale  in  meeting  needed  extensions.  The  only  other  commission  of 


31 

any  age  which  has  considered  this  question  very  fully  is  the  Public  Service  Com- 
mission of  the  First  District  of  New  York,  covering  the  City  of  New  York. 

In  the  cases  of  the  Queens  Borough  Gas  and  Electric  Company,  decided 
June  23,  1911;  the  Brooklyn  Borough  Gas  Company,  decided  August  18,  1911,  and 
the  Kings  County  Lighting  Company,  decided  October  20  and  November  17,  1911, 
this  Commission  held  that  if  the  company  were  entitled  to  capitalize  the  increased 
value  of  its  land,  then  the  annual  increase  of  such  value  should  form  part  of  the 
reasonable  rate  of  return  to  which  it  was  entitled  and  the  returns  from  the 
consumer  in  charges  should  be  proportionately  reduced. 

Commissioner  Lane  of  the  Interstate  Commerce  Commission,  in  rendering  the 
report  of  the  Commission,  relative  to  the  proposed  advances  in  the  Western 
Trunk  Line  Trans-Missouri  and  Illinois  Freight  Committee  territories,  held 
(20  I.  C.  C.  Eep.  page  344): 

"Whatever  the  true  economic  or  legal  view  may  be  as  to  the  right  of  a 
carrier  to  consider  the  increase  in  value  of  its  land  as  a  part  of  the  value  upon 
which  it  is  entitled  to  a  reasonable  return,  such  increase  in  value  does  not  of 
itself  establish  the  right  of  a  carrier  to  increase  rates  upon  a  given  service. 
Certainly  if  the  Supreme  Court  may  decline  to  lay  down  the  absolute  rule  that 
'in  every  case  the  failure  to  produce  some  profit  to  those  who  have  invested  their 
money  in  the  building  of  a  road  is  conclusive  that  the  tariff  is  unjust  and  unrea- 
sonable.' (Eeagan  v.  Farmers'  Loan  &  Trust  Co.,  154  U.  S.  412.),  it  is  a  con- 
servative statement  of  the  law  to  hold  that  a  railroad  may  not  increase  the 
rates  upon  a  number  of  commodities  solely  because  its  real  estate  has  risen  in 
value. ' ' 

If  the  appraisal  be  correct,  the  value  of  the  land  has  increased  from 
$601,801.14  to  $1,331,642.60.  This  is  a  yearly  arithmetical  increase  of  10.5% 
on  its  original  cost.  The  method  by  which  this  result  is  reached  is  as  follows: 
The  cost  of  the  land  on  December  31,  1887,  was  $40,420.  Now,  $40,420  used  for 
24  years  to  the  close  of  1911  is  equivalent  to  $1,018,080  used  for  one  year.  By 
December  31,  1892,  an  additional  amount  of  land  had  been  acquired  costing 
$182,634.  This  for  19  years  is  equivalent  to  $3,470,046  for  one  year.  Reckoned  in 
this  way  the  land  is  equivalent  to  $6,995,621  for  one  year.  The  total  increase 
of  value  of  $729,841.46  is  10.43%  of  this.  An  increase  of  10.43%  of  the  original 
cost  ($601,801.14)  owned  on  August  1,  1911,  the  date  of  the  appraisal,  is  $62,768 
a  year.  This  is  the  annual  amount  of  increase  of  land  values  which  on  the 
basis  of  its  past  history  the  Company  may  reasonably  expect  to  receive  during  the 
next  few  years.  It  represents  an  addition  to  its  income  of  about  one-quarter 
of  1%  on  its  stock,  and  is  taken  into  consideration  by  the  New  York  Public 
Service  Commission,  First  District,  in  fixing  rates. 

Paving. 

The  appraised  value  of  the  paving  over  the  conduits  in  the  city  is  $2,198,916. 
Of  all  the  conduits,  84%  are  under  the  paving,  but  2/7  of  this  paving  was  put 
down  after  the  laying  of  the  conduits,  and  represents  no  investment  by  the 
Telephone  Company.  The  appraisal  of  this  portion  of  the  paving,  $628,262, 
should  be  deducted.  This  is  in  accordance  with  the  ruling  of  the  Wisconsin 
Eailroad  Commission,  the  New  York  Public  Service  Commission  of  the  First 
District,  the  Massachusetts  Gas  and  Electric  Light  Commission,  the  Iowa  State 
Supreme  Court,  recently  confirmed  by  the  United  States  Court  in  the  Cedar 
Eapids  gas  case,  and  by  Judge  McPherson  of  the  United  States  District  Court 
in  the  Des  Moines  gas  case. 

Commenting  on  the  matter  of  paving,  and  on  the  general  theory  of  considering 
only  the  cost  of  reproduction,  which  is  the  method  used  by  Byllesby  and  Arnold, 
Judge  McPherson  in  his  opinion,  August  21,  1912,  says: 

"But  the  question  is  as  to  its  value  to-day  with  reference  to  income.  What 
it  may  have  cost  is  pertinent.  What  it  will  sell  for  is  to  be  considered.  And  if 
destroyed  by  any  agency,  such  as  rust,  crystallization,  or  other  forces,  what  must 
be  paid  to  reproduce  it  is  a  subject  of  inquiry.  All  of  these  may  be  considered. 
In  my  opinion  those  who  maintain  that  what  it  will  cost  to  reproduce  the  plant, 
less  depreciation,  is  the  true  value,  in  many  instances,  confound  the  real  question 
with  one  of  many  evidences  of  the  real  value.  Reproducing  cost  is  an  evidence  of 


32 

what  the  real  value  is  after  subtracting  the  depreciation.  But  what  is  to  be 
done  with  the  value  of  stocks  and  bonds  on  the  reproductive  theory?  And  what 
becomes  of  the  original  cost  on  the  reproduction  theory?  And  what  becomes  of 
the  question  of  the  increase  or  falling  off  in  numbers  of  consumers?  And  the 
same  as  to  increased  or  diminished  expenses? 

' '  The  theory  at  first  thought  in  all  cases  is  plausible  and  attractive,  but  in 
the  end  is  oftentimes  utterly  illogical  and  unreliable,  originally  adopted  as  a  mere 
time-saver  by  mere  theorists,  and  sought  to  be  enforced  as  against  substantial 
unbending  facts.  If  the  plant  is  to  be  reproduced,  when  is  it  to  be  done?  If 
reproduced,  will  the  streets  then  be  paved,  and,  if  paved,  paved  with  what? 
Must  it  all  be  reproduced  at  once,  or  the  same  covered  by  a  number  of 
years?  If  but  gradually  reproduced,  why  should  not  such  cost  go  into  either 
the  operating  or  maintenance  account?  No  one  can  state  when  it  must  be  repro- 
duced, and  a  material  question  arises:  What,  then,  as  compared  with  the  present, 
will  be  the  price  of  labor,  material  and  freight?  But  finally  and  to  my  mind  the 
conclusive  reason  against  the  soundness  of  the  reproduction  under  paved  streets 
theory  is,  that  to  allow  that  theory  to  prevail,  and  to  increase  the  capitalization 
now  to  the  extent  of  $140,000,  is  to  allow  such  gas  rates  as  will  pay  a  dividend 
on  such  sum  from  and  after  this  date.  But  the  sum  of  $140,000  is  not  put  in 
the  capital  or  value  account  until  the  plant  is  reproduced. 

"As,  of  course,  streets  paved  or  uupaved  make  no  difference  in  the  earning 
power  of  the  gas  plant,  and  but  little,  if  anything,  goes  more  directly  and  accu- 
rately to  the  question  of  value  of  any  structure  or  plant  than  its  rental,  earnings, 
or  as  a  dividend  producer. 

' '  There  are  many  instances  in  which  the  reproduction  theory  is  the  best  of  all 
methods  for  getting  at  the  present  value,  and  in  other  instances  the  most  mislead- 
ing. And  it  is  deceptive,  in  my  opinion,  to  now  add  the  cost  of  taking  up  and 
replacing  pipe  under  paved  streets  at  an  estimated  cost  of  $140,000  extra,  and 
does  not  warrant  an  increased  dividend  of  $8,400  or  some  greater  sum.  Such  a 
dividend  is  a  mere  paper  dividend,  and  is  arrived  at,  not  because  of  increased 
earnings,  not  because  of  increased  capital  or  investments,  not  because  of  increased 
operating  or  maintenance  expenses,  but  solely  by  reason  of  a  supposed  necessity 
of  at  some  time  replacing  the  same,  in  some  manner,  under  a  then  some  kind  of 
street,  on  a  mere  guess  of  what  labor  and  material  would  then  cost.  Many  of  the 
principles  with  relation  to  railway  rates  are  applicable  to  gas  rates.  And  perhaps 
the  latest  analysis  of  the  reproduction  theory  is  found  in  the  recent  case  of  Louis- 
ville R.  R.  v.  Railway  Commission,  196  Fed.  Rep.  800,  in  an  opinion  of  Judge 
Jones  of  the  Alabama  District.  He  shows  the  value  of  this  theory,  but  likewise 
shows  that  it  is  not  a  hard  and  fast  rule  covering  all  phases.  Finally,  pipes  under 
a  paved  street  are  of  very  long  life;  many  times  longer  than  if  the  street  were 
not  paved. 

' '  The  theory  applied  to  paved  streets  is  but  a  theory,  is  illogical  and  against 
facts,  and  was  properly  denied  by  the  Master." 

An  added  reason  of  great  importance  in  this  case  for  excluding  paving  since 
the  laying  the  conduit  is  in  the  ordinance  of  November  6,  1907.  This  provided 
that  if  the  city  should  purchase  the  property  on  January  1,  1919,  or  1924,  or  after 
the  expiration  of  the  franchise  January  8,  1929,  should  transfer  to  any  other 
company  such  right,  the  rules  governing  the  valuation  to  appraisers  should  be 
as  follows: 

' '  The  appraisers  shall  determine  what  tangible  property,  real  and  personal, 
owned  by  the  said  Company,  and  used  for  the  purposes  of  this  grant,  is  reason- 
ably required  for  its  continued  operation,  taking  into  consideration  the  then  con- 
dition of  the  art,  and  in  determining  the  fair  cash  value  of  said  property  they 
shall  not  take  into  consideration  its  earning  power,  or  the  value  of  the  rights  or 
privileges  hereby  granted,  or  the  value  of  any  license  or  franchise,  but  shall  allow 
for  the  property  the  then  cost  of  duplication,  taking  into  consideration  the  then 
condition  of  the  art,  less  depreciation.  In  considering  the  cost  of  duplication  of 
underground  conduits,  wires,  cables,  electrical  conductors  and  any  other  under- 
ground construction  located  in  any  street,  alley  or  other  public  way  which  was 
or  were  placed  therein  at  a  time  when  such  street,  alley  or  other  public  way  was 
unpaved,  the  said  appraisers  shall  not  take  into  consideration  the  cost  and 
expense  of  removing  or  replacing  any  paving,  or  part  thereof,  in  such  street,  alley 
or  other  public  way.  An  award  in  writing,  signed  by  a  majority  of  the  appraisers, 
shall  be  valid  and  binding  upon  the  parties." 


33 

Working  Capital. 

The  appraisers  not  only  appraised  working  assets,  such  as  supplies,  at 
$921,596,  but  they  assume  that  the  Company  needs,  in  cash  or  its  equivalent 
$1,050,000.  This  form  of  working  capital  they  divided  between  the  city,  $887,250, 
and  the  suburban  division,  $162,750.  The  total  when  added  to  the  supplies  makes 
a  total  working  capital  of  $1,971,596.  Even  the  estimate  made  by  Mr.  Hall,  of 
$1,750,000,  seems  large. 

Expenses  for  one  and  one-half  months  would  be  one-eighth  of  the  $8,836,827.49 
of  total  expenses  in  1911.  In  other  words,  it  would  amount  to  $1,104,603.44.  In 
a  company  which  collects  its  revenue  monthly  and  reeeives  some  of  it  in  advance, 
a  working  capital  equal  to  the  expenditures  for  one  and  one-half  months  would 
appear  to  be  ample,  especially  in  view  of  the  fact  that  it  can  obtain  at  least  30 
days'  credit  on  most  of  its  purchase  of  supplies.  Now,  one-eighth  of  the  entire 
payroll  for  the  year  1911,  of  $6,332,485,  is  only  $791,561.  The  current  assets 
of  cash  and  deposits,  bills  and  accounts  receivable,  and  prepaid  expenses  at  the 
close  of  1911,  exceeded  the  accounts  payable  presumably  non-interest  bearing 
by  only  $475,212.17.  Such  a  sum  added  to  the  entire  appraised  value  of  the 
supplies,  of  $921,596,  would  be  only  $1,396,808.17. 

In  view  of  all  this,  $1,500,000  would  appear  to  be  a  maximum  amount 
necessary  to  allow  for  all  forms  of  working  capital.  This  is  $578,404  in  excess 
of  supplies  at  hand.  However,  as  the  matter  relatively  is  not  of  large  importance, 
$1,750,000  may  be  used  for  the  entire  working  capital,  or  $828,404  for  that 
portion  of  the  same,  viz.,  cash  or  its  equivalent,  for  which  the  appraisers  allow 
$1,050,000.  A  reduction  from  the  appraisal  may  thus  be  made  of  $221,596. 

If  this  be  apportioned  between  the  city  and  suburban  territory,  in  the 
ratio  of  the  reproduction  value,  then  76.26%,  or  $168,989,  would  be  taken  from 
the  working  capital  allowed  by  the  appraisers  for  the  City. 

/ 

Cost  of  Plant  Development. 

After  reaching  a  reproduction  value  new  for  the  physical  property  of 
$44,898.104,  or  one-third  more  than  the  $33,000,000  of  stock,  bonds  and  loans  from 
the  banks,  the  appraisers  add  $747,988  for  changes  that  may  be  made  in  the  plans 
as  the  work  of  construction  during  the  assumed  five-year  period  proceeds.  In 
the  words  of  the  appraisers: 

"The  expenditures  cover  a  variety  of  items,  such  as  the  alteration  or  recon- 
struction of  buildings  to  provide  for  the  enlargement  of  the  plant,  and  reconstruc- 
tion or  enlargement  of  equipment  incident  to  the  growth  of  -the  business.  For 
example,  certain  exchange  offices  when  built  were  of  ample  capacity  to  handle 
the  needs  of  the  company  at  the  time  they  were  constructed.  They,  however, 
were  built  with  provision  for  extension  at  a  future  time,  and  at  a  later  date  they 
were  reconstructed  and  enlarged  as  necessary  to  handle  the  needs  of  the  com- 
pany. As  a  result  the  total  expense  of  buildings  to  the  telephone  company, 
including  this  reconstruction,  is  greater  than  the  value  of  the  property  as  deter- 
mined by  inventory  of  the  building  as  it  now  stands. 

"In  a  similar  way,  many  changes  in  telephone  equipment  have  been  made 
due  to  the  development  of  the  business,  which  have  entailed  expenditures  that 
would  not  be  included  in  any  value  arrived  at  by  the  inventory.  It  is  the  inten- 
tion to  include  in  the  plant  development  expense  such  an  amount  as  would  repre- 
sent the  normal  expenditure  that  would  be  made  in  case  the  property  is  repro- 
duced within  the  assumed  construction  period  of  from  five  to  eight  years." 

The  allowance  for  this  purpose  is  2%  on  the  cost  of  buildings,  central  office 
equipment,  subscribers'  station  equipment  and  exchange  and  toll  lines. 

It  may  be  a  logical  consequence  of  the  theory  of  reproduction  to  allow  this 
plant  development  cost,  but  to  one  who  holds  that  a  voucher  is  better  than  an 
estimate,  and  that  the  cost  of  recent  construction  furnishes  better  unit  figures  for 
reconstruction  than  does  the  judgment  of  even  the  best  engineers,  it  does  not 
appear  to  be  a  correct  view.  Since  the  entire  construction  cost  that  has  gone 
on  the  books  of  the  Company  is  only  five-sixths  of  the  estimated  reproduction 
cost  as  estimated  by  Byllesby  and  Arnold,  a  further  addition  of  nearly  $750,000 
for  estimated  changes  of  plant  during  construction  seems  hardly  warranted. 


34 

The  cost  of  such  changes  must  have  been  put  upon  the  books  and  must  have 
appeared  in  the  book  value  of  the  property,  or  must  have  been  charged  to  oper- 
ating expenses  and  thus  have  been  paid  for  by  the  telephone  subscriber.  In  the 
former  case,  the  Company  secures  the  equivalent  of  the  above  cost.  In  the 
latter  case,  it  does  not  appear  entitled  to  this  value,  if  secured  from  the  con- 
sumers under  the  guise  of  operating  expenses.  If  the  latter,  as  put  upon  the 
books,  had  been  less,  the  profits  would  have  appeared  to  the  communtiy  greater, 
and  there  might  have  been  an  even  larger  reduction  of  rates  in  the  November, 
1907,  ordinance  than  was  made. 

Cost  of  Developing  the  Business. 

For  the  cost  of  developing  the  business  in  the  city,  the  appraisers  have  added 
$4,753,993,  and  in  the  entire  territory  $7,094,246.  The  estimate  is  so  large  and 
the  matter  so  important  that  the  argument  of  the  appraisers  may  be  quoted: 

"It  is  needless  to  say  that  the  physical  plant  of  the  company  has  no  value 
other  than  second-hand  or  scrap  value,  unless  the  plant  is  utilized  for  the  purpose 
for  which  it  is  constructed,  and  the  plant  cannot  be  utilized  for  this  purpose 
unless  the  business  has  been  secured. 

"In  estimating  this  element  of  value,  the  following  method  has  been  pursued. 
It  has  been  assumed,  as  stated  before,  that  the  property  could  be  reproduced  within 
a  period  of  five  years.  A  construction  schedule  has  been  prepared,  in  which  dates 
are  assigned  for  the  construction  of  various  portions  of  the  property  now  existing. 
In  making  up  this  schedule  the  plant  has  been  reproduced  somewhat  as  follows: 

"It  has  been  assumed  that,  first,  certain  pieces  of  real  estate  for  downtown 
offices  will  be  purchased,  and,  next,  that  the  exchange  buildings  will  be  con- 
structed, building  space  to  be  of  the  present  capacity,  and  that  central  office 
equipment  or  a  fraction  of  the  present  capacity  will  be  installed  as  the  first 
installation;  also  that  the  conduit  lines  in  the  given  section  will  be  built  com- 
plete, and  that  sufficient  cables  will  be  installed  with  the  first  installation  to 
serve  the  partial  equipment  installed  in  the  offices.  Furthermore,  it  is  assumed 
that  a  certain  number  of  subscribers  will  be  obtained  as  soon  as  this  equipment 
is  ready  for  service,  and  at  that  time  the  substation  equipment  will  be  provided. 
During  •&  later  year  additional  offices  will  be  constructed  and  additional  units  will 
be  installed  in  the  offices  already  partially  equipped. 

"An  additional  item  of  expense,  which  is  part  of  the  cost  of  securing  busi- 
ness, is  included  in  this  schedule  at  this  point,  representing  the  cost  of  securing 
subscribers  and  printing  the  first  issue  of  the  directory,  which  amounts,  as  shown 
by  study  of  the  present  operating  statistics,  to  slightly  over  $4.00  per  subscriber, 
and  the  total  obtained  by  multiplying  the  total  number  of  subscribers  by  this 
amount  is  included  in  the  proper  column  in  the  table. 

"The  schedule  thus  arranged  provides  for  the  completion  of  the  entire  prop- 
erty within  five  years.  The  amount  expended  during  this  time  is  the  amount 
shown  in  the  appraisal  exclusive  of  carrying  charge.  It  has  further  been  assumed 
that  that  company  has  a  right  to  earn  a  fair  return  on  the  amount  of  money 
invested,  and  during  any  given  period  in  the  schedule  after  the  first  period  a 
return  has  been  figured  on  the  investment  at  the  end  of  the  preceding  period. ' ' 

The  appraisers  give  further  explanations  and  elaborate  computations  to 
show  how,  if  a  company  started  a  new  plant  in  Chicago  today,  with  a  field  clear 
from  competition,  it  would  cost  $7,000,000  to  develop  the  business  of  the  present 
company.  In  other  words,  the  appraisers  are  seeking  to  estimate  what  is  usually 
considered  a  form  of  "going  value"  based  on  a  10%  return  on  the  investment 
in  the  developing  plant.  Byllesby  and  Arnold  prefer  to  call  this  by  another 
name.  It  is  the  idea  rather  than  the  name  that  is  important. 

The  theory  assumes,  although  it  does  not  directly  state,  that  the  people  of 
Chicago  are  to  forget  their  knowledge  of  telephones  and  must  be  solicited,  at 
much  expense,  in  order  to  become  acquainted  with  them.  To  imagine  such  a 
condition  of  sudden  collapse  of  memory  in  this  or  any  other  city  might  be  natural 
to  builders  of  air  castles  or  to  the  well-nigh  extinct  type  of  pure  theorists  among 
college  professors  who  have  been  so  much  of  a  butt  of  ridicule  among  "practical 
men,"  but  it  seems  curious  when  coming  from  prominent  engineers.  If  Chicago 
were  suddenly  bereft  of  all  telephone  service  by  a  San  Francisco  earthquake  or 
some  other  catastrophe  the  present  subscribers  would  need  no  soliciting  to  resume 


35 

the  service  at  the  very  earliest  possible  moment.  Indeed,  one  of  the  notable 
features  of  Chicago  telephone  history  has  been  the  almost  entire  absence  of  expense 
for  soliciting  of  new  business.  In  this  respect  it  more  closely  resembles  the  street 
railway  than  the  lighting  utilities. 

It  is  indeed  true  that  without  business  the  physical  plant  would  only  have 
a  scrap  value.  The  cost  of  construction  of  the  plant,  even  if  it  be  $40,000,000, 
would  not  give  the  value  without  a  demand  for  the  service.  In  assuming  a 
demand  sufficient  to  give  a  value  equivalent  to  the  cost  of  the  physical  property, 
a  certain  type  of  going  value  is  thereby  generally  conceded. 

If  the  courts  shall  insist  upon  allowing  public  utilities  a  further  value  beyond 
the  investment,  our  public  service  commissions  are  likely  to  reduce  the  rate 
of  return  correspondingly,  leaving  to  the  companies  but  little  more  than  just 
enough  to  escape  the  charge  of  ordering  a  confiscatory  rate. 

The  United  States  Supreme  Court,  after  listening  to  able  arguments  on  behalf 
not  only  of  good  will  but  of  going  value  in  the  Consolidated  Gas  case  of  New  York 
in  1898-9,  and  in  the  Cedar  Eapids  gas  case  in  1912,  entirely  ignored  the  claim, 
while  in  the  Knoxville  water  case,  decided  January,  1909,  the  court  allowed  it,  but 
distinctly  stated  that  it  was  not  to  be  considered  a  precedent. 

None  of  the  six  prominent  public  utility  commissions  of  Massachusetts,  New 
York,  Wisconsin,  New  Jersey  and  Maryland  have  so  far  allowed  any  going  value, 
except  in  Wisconsin,  and  there  only  where,  in  the  long  run,  the  dividends  in  the  . 
past  have  not  appeared  to  the  commission  to  be  fair  and  reasonable.     No  such 
claim  of  lack  of  good  dividends  in  the  past  can  be  made  here. 

Early  Profits. 

In  1881,  the  first  year  of  the  Company's  history,  no  dividends  were  paid. 
From  that  time  until  1908  the  dividends  were  never  less  than  10%.  They  were 
reduced  to  8%  in  1908  and  have  been  of  that  amount  since  then;  but  the  reduction 
from  10%  to  8%  was  accompanied  by  an  increase  of  stock  out  of  earnings  from 
$22,500,000  to  $27,000,000.  The  actual  dividend,  thus,  on  the  stock  representing 
any  cash  contribution  from  the  stockholders,  scarcely  declined  at  all. 

In  other  words,  the  dividends  now  paid  of  $2,160,000  on  $27,000,000  of 
stock  represent  9.6%  on  the  $22,500,000  worth  of  stock  outstanding  at  the  close 
of  1907,  before  the  capitalization  of  surplus  earnings. 

It  is  interesting  to  observe  that  had  the  stockholders  been  content  with 
10%  on  their  actual  contribution  from  the  start,  and  had  they  been  further 
content  to  pay  off  the  stock  out  of  earnings  in  excess  of  10%  on  their  outstanding 
stock  when  there  were  such  earnings,  the  stock  would  have  all  been  redeemed  and 
all  the  extensions  would  have  been  paid  for  out  of  earnings  on  January  1,  1912, 
with  the  exception  of  $5,000,000  of  bonded  debt. 

The  method  of  computing  this  may  be  illustrated  by  the  first  three  years 
of  the  Company.  In  1881,  when  no  dividends  were  paid  on  the  $500,000  of  stock, 
10%  allowance,  or  $50,000,  would  on  this  theory  be  added,  making  the  claim 
of  the  stockholders  $550,000  on  January  1,  1882.  Ten  per  cent,  on  this,  or  $55,000, 
that  year  would  raise  the  claim  to  $605,000,  less  the  dividends  actually  paid  of 
$148,000.  This  leaves  the  net  claim  against  the  public  on  this  theory  of  $457,000. 

In  1883  an  allowance  of  10%  on  this,  together  with  $100,000  of  new  stock  for 
money  put  into  the  plant,  makes  the  total  claim  $602,700  less  $220,000  actually 
paid  in  dividends,  or  a  net  claim  December  31,  1911,  of  $382,700.  In  this  way 
the  property  would  have  all  been  paid  for  by  1887  and  no  stock  would  have  been 
needed  again  until  1901,  and  that  stock  would  have  finally  been  canceled  with 
10%  thereon  before  January  1,  1912. 

These  computations  are  not  given  here  for  anything  more  than  an  illus- 
tration of  the  profitableness  of  the  business.  It  is  only  under  municipal  ownership, 
when  well  managed,  that  profits  above  4%  to  5%  interest  on  the  bonded  debt 
are  devoted  to  retiring  the  debt  and  thus  capitalizing  the  business. 

The  total  dividends  paid  by  the  Chicago  Telephone  Company,  from  1881  to 
the  close  of  1907,  when  the  present  ordinance  went  into  effect,  were  $16,951,765. 
This  was  an  average  of  12.66%  of  the  sum  of  the  average  outstanding  stock  of  the 
several  years.  Had  the  addition  of  $1,000,000  to  the  stock  in  1900,  without  any 
direct  payment  therefor  by  the  stockholders,  been  omitted  from  the  calculation 
of  average  stock  outstanding,  the  dividends  would  have  averaged  over  13%. 


36 

TABLE  12. 
APPRAISAL  OF  PHYSICAL  PROPERTY  AND  REJECTED  ITEMS. 

City  and 
Description.  City.  Suburban. 

Rejected  working  capital   $      168,989         $      221,596 

Rejected    paving 628,262  628,262 

Rejected   overhead    1,268,696  1,757,684 

Total   rejected    $  2,065,947         $  2,607,542 

Appraisal   new    34,325,894  44,898,103 

Value  new  less  rejected  items   32,259,947  42,290,561 

The  rejection  of  the  above  items  and  of  the  items  of  plant  development  and 
the  cost  of  developing  the  business  reduces  the  appraisal  of  the  property  new  to: 
City  and  Suburban  property,  $42,290,562 

City  property  only,  32,259.947 

The  rejected  paving  item  of  $628,216,  laid  since  the  conduits  were  put  in, 
belongs  entirely  to  the  city  portion  of  the  plant.  The  rejected  part  of  the  work- 
ing capital  has  been  apportioned  to  the  city  in  the  same  percentage  of  the  whole 
(76.26%)  as  is  the  proportion  of  the  entire  city  property,  aside  from  cash  and  its 
equivalent,  to  the  total. 

Present  Value. 

The  last  two  of  the  nine  large  volumes  of  the  appraisal  are  devoted  to  the 
determination  of  the  present  or  depreciated  value  of  the  physical  property.  No 
depreciation  is  recognized  in  the  items  of  "plant  development"  and  "cost  of 
developing  the  business." 

Following  a  common  practice,  no  depreciation  is  found  in  land  or  construction 
in  process,  or  such  part  of  the  working  capital  as  is  represented  by  cash  or 
fluid  assets  readily  converitble  into  cash.  The  other  90%  of  the  physical  prop- 
erty is  depreciated  by  the  appraisers  77.28%  in  the  city  and  76%  in  the  entire 
system.  The  method  taken  may  be  briefly  examined. 

Life. 

The  appraisal  gives  two  columns  of  estimated  life.  In  one  column,  known  as 
b,  the  appraisers  take  an  estimated  life  for  each  portion  of  the  property  based 
on  its  probable  duration,  if  affected  only  by  wear  and  not  at  all  by  obsolescence 
or  inadequacy,  or  other  causes.  In  the  second  column,  known  as  a,  they  take 
a  shorter  estimated  life,  based  on  conditions  of  obsolescence,  inadequacy,  etc., 
which  have  been  observed  in  Chicago  and  similar  large  cities.  Column  b  is  called 
a  life  "due  to  age  and  wear  only,"  and  column  a  is  called  a  life  "due  to  service." 
In  the  table  following,  three  columns  are  added  to  include  the  estimates  of  the 
Chicago  Telephone  Commission,  of  D.  C.  Jackson,  Win.  H.  Crumb  and  Geo.  W. 
Wilder,  in  April,  1907;  the  estimates  of  Westinghouse,  Church,  Kerr  &  Co.,  in 
their  report  in  March,  1911,  and  the  estimates  of-  E.  L.  Cline,  in  Telephony, 
July  2,  1910. 


37 

TABLE  13. 
LIFE. 


Description. 

Byllesby  and  Arnold 

$ 
»  Chicago  Commission 
•j> 

*i 
E 

oo 
3 
0     „ 

«oo 
Years. 

O    „ 
.  ='o 

"  ,£J   O 

b 
Due     to     age 
and  wear  and 
tear  only. 
Years. 

a 
Due      to      all 
forms    of    de- 
preciation. 
Years. 

Buildings     

60  to  100 

30  to  60              40               50                   50 
16  2-3                8              15                  10 
12  to  15                8              10                  10 
15              10              10                  10 
50             50             50         Unknown 

18              20              20                  25 
14              15                                    20 
12.5           15              17.5               15 
10  to  14              10              15          10  to   19 

15              40              40                  15 
15               30               20                   15 

Central  office  equipment 
Private  branch  boards.. 

25 
15  to  20 

Substation   apparatus.  .  . 

.  .  .  .                  20 

Clay  conduit  lines    .... 

.  .      Indefinite 

Underground  cable,  main 
toll     .  .  . 

and 
sn 

Underground  cable  subsidiary               35 
Aerial    cable  25 

Poles    and    cross-arms.  . 

IS 

Copper   wire,   long   distance 
and  toll  lines  25 

Copper  wire  exchange  lines.                 20 

It  will  be  observed  that  Byllesby  and  Arnold  in  Column  a  assumed  a  longer 
life  for  central  office  and  sub-station  equipment  and  a  shorter  life  for  conduits 
and  cable  than  do  the  others. 


TABLE  14.  SALVAGE. 


Byllesby  & 

Arnold 

a 

# 

. 

o 

E 

OH  q 

—  o 

|M 

b 

a 

EH   01 

0      „ 

a 

Description. 

Age    and      All 

forms 

al 

—  — 

we 

a  ^ 

M 

'-0  A  6 

.  ^ 

wear    only  of 

deprec- 

;IQ 

X  -f-^.  f-^. 

0)  O  Q 

iation. 

° 

^ 

Buildings   0                         0 

000 

Central  office  equipment.  ) 
Central   battery  / 

20                    20                    20 

Private  branch  boards  ...          0                      10. 

5                   20                     15                    20 

Substation  apparatus  ....          0                      10. 

5                    10                     15 

City  conduits    0                       0 

000 

Underground  cable  main.    1  to  37               35. 

2                    40                     40                     40 

Underground  cable  sub- 

sidiary       0  to  39               10. 

4                    40                     40                     40 

Aerial  cable  2  to  35               19. 

7                    40                     30                     40 

Poles  and   cross-arms....         0                      0 

0                       0              0  to  20 

Copper  wire  .                              40                     45 

70                     50                .     70 

38 


Byllesby  and  Arnold  estimated  less  net  salvage   (column  a)   than  do  others. 
The  net  salvage  allowed  on  some  parts  of  the  property  is  here  given: 

10.46% 


Sub-station    equipment, 
Underground  cables,  mains, 
Underground   cable,    subsidiary, 
House  cable, 
Aerial   cable, 
Aerial  wire, 


35.67% 
9.57% 
4.55% 
19.54% 
29.32% 


TABLE  15. 

ANNUAL  DEPRECIATION. 
Percentage  of  Cost. 


Byllesby  and  Arnold 

Chicago 
Telephone  Westing- 

Description. 

b 
Age  and 
wear  only. 

a              Company,      house       E.  L. 
All  forms  of     Sinking      Church      Cline. 
depreciation.     Fund.     Kerr  &  Co. 

Buildings   

.1  to  2 

1.5  to  2 
6.00 
6.67 
6.67 
2.00 
5.50 

7.00 

8.00 
6.66 
6.50 

1.33 
11.25 
11.25 
8.73 
.89 
3.72 

5.38 
5.38 
8.73 
5.38 

2.0 
5.3 

8.5 
2.0 
3.0 

4.0 
6.6 
2.5 

2 
8 
8 

1 

2.4 

3 
4 
4.2  to  11.25 
2 

Central  office  equipment. 
Private  branch  board.  .  .  . 

.3.8 
.5.0 

Sub-station    apparatus  .  .  . 
Clay  conduit  lines  

.5.0 
.0.0 

Underground  cable  

.1.26  to   1.98 

Underground  cable  subsid- 
iary        2  03   tn   2.85 

Aerial  cable  

.2.60  to   3.92 

Poles    and    cross-arms... 
Copper   wire    

.4.16  to   5.55 
.2.4 

Byllesby  and  Arnold  estimate  (column  a)  less  depreciation  yearly  on  central 
and  sub-station  equipment  and  more  depreciation  on  underground  and  aerial  con- 
struction than  do  the  others. 

•Applying  the  above  percentages  of  depreciation,  based  on  the  age,  salvage 
and  assumed  life  of  the  several  parts  of  the  telephone  property,  the  appraisers 
reached  the  following  results: 

TABLE  16. 

DEPEECIATED  OE  PRESENT  VALUE. 


Description. 


Citv. 


City  and 
Suburbs. 


Total  reproduction  value  new,  including  land  and  work- 
ing capital  $34,325,894  $44,898,103 

Present  value  "b"  on  the  basis  of  age  and  wear  only.   29,838,803  38,201,873 

Percentage  to  value  new 86.58%  84.73% 

Present  value  "a"  on  the  basis  of  obsolescence  and 
inadequacy  and  other  conditions  of  actual  service 
in  Chicago  27,312,425  35,073,692 

Percentage  to  value  new    79.03%  77.59% 

According  to  the  books  of  the  Company,  the  total  cost  of  the  property  in 
the  city  and  suburbs  on  August  1,  1911,  amounted  to  $36,852,122.15,  or,  with  a 
proper  allowance  for  cash  and  its  equivalent,  about  $37,700,000.  From  this,  how- 
ever, $419,373.66*  should  be  deducted  for  property  that  was  scrapped  before 

*$1,502.28  was  deducted  by  Hall  on  Buildings. 


39 

December  31,  1911,  or  more  properly  the  $366,280.69  scrapped  before  August  1, 
1911,  -which,  by  an  oversight,  was  not  noted  in  the  books  (Hall's  Eeport,  page  14). 
This  would  leave  the  cost,  according  to  the  books,  about  $37,300,000.  The  present 
value  of  this  property  would  be  determined  by  deducting  the  amount  at  the 
credit  of  the  depreciation  reserve  August  1,  1911.  The  addition  to  the  reserve 
for  the  year  1911  was  slightly  over  $1,200,000,  or  approximately  $700,000  for  the 
seven  months.  This  added  to  the  $3,700,000,  December  31,  1910,  gives  $4,400,000 
contributed  by  the  telephone  users  up  to  August  1,  1911.  The  present  value, 
according  to  the  books,  is  therefore  $32,900,000,  which  confirms  the  value  found 
below  from  the  appraisal,  viz.,  $32,813,246. 

If  we  apply  to  the  appraisal  new  less  the  items  rejected  in  the  present  report, 
the  same  precentages  of  depreciation  as  were  used  by  Byllesby  and  Arnold  for  all 
items,  namely:  20.432%  for  the  city  and  22.41%  for  city  and  suburbs,  the  present 
value  of  the  conceded  items  of  the  appraisal  new  of  $32,259.947  within  the  city 
and  $42,290,562  in  the  city  and  suburbs  will  be: 

Conceded  present  value  in  city,  $25,495,036 

Conceded  present  value  in  city  and  suburbs,  32,813,246 

It  also  appears  that  the  corrected  present  value  for  the  entire  property  to 
August  1st,  of  $32,813,246,  is  nearly  equal  to  the  $33,000,000  of  stocks,  bonds  and 
loans  from  the  banks  on  December  31,  1911.  By  that  date,  however,  the  addition 
of  $2,095,270  to  the  physical  property  during  the  last  five  months  of  1911,  brought 
the  value  of  the  physical  property  on  the  above  basis  to  $34,908,516,  or  in  round 
figures,  $35,000,000.  This  is  $2,000,000  more  than  the  investment  by  the  stock 
and  bondholders  and  the  banks  on  the  date  in  question,  December  31,  1911,  and 
is  substantially  equivalent  to  the  non-interest  bearing  liabilities. 

Possibly  a  more  exhaustive  examination  of  the  appraisal  might  make  such 
further  reductions  as  to  bring  the  value  on  December  31st  down  to  $33,000,000. 
On  the  other  hand,  the  Company  might  succeed  in  showing  that  too  much  has 
been  rejected  in  the  above  computations. 

The  important  point  in  this  particular  matter  is  that  through  the  rise  of 
land  values,  the  increase  in  the  cost  of  labor  and  materials  and  the  investment  of 
reserves  of  $5,091,000  collected  from  the  telephone  users,  the  plant  on  December 
31,  1911,  was  worth  about  $2,000,000  more  than  the  outstanding  stocks,  bonds 
and  obligations  to  the  banks.  These  three  items,  aggregating  $33,000,000,  repre- 
sent the  investment  of  capital  in  the  Company. 

Prior  to  1891  the  dividend  rate  was  always  30%  to  51%.  During  that  time 
$494,352  of  new  stock  was  subscribed  for  from  the  dividend,  or  was  allotted 
to  the  stockholder  simultaneously  with  the  payment  of  the  dividends.  Stock 
dividends  of  $1,000,000  in  1900,  and  of  $4,500,000  in  1908,  were  issued  to  repr- 
sent  surplus  earnings  that  had  gone  into  the  plant,  in  addition  to  the  regular 
dividends  which,  prior  to  1908,,  had  never  been  under  10%.  Since  these  stock 
dividends  of  about  $6,000,000  out  of  the  existing  $27,000,000  of  stock  represented 
actual  investment  in  the  property,  even  though  paid  for  by  the  telephone  user, 
the  present  stock,  as  well  as  the  bonds,  represents  actual  capital  rather  than 
what  is  usually  meant  by  "water." 

The  question  of  how  the  capital  was  secured  has  more  importance  when  the 
present  8%  dividend  rate  is  considered. 

In  addition  to  expenditures  for  maintenance  that  have  gradually  declined 
from  10%  to  7.4%  of  the  average  depreciable  investment,  $5,000,000  appears  to 
have  been  necessary  to  keep  the  investment  intact  through  the  past  20  and  more 
years.  This,  however,  is  far  from  establishing  the  propriety  of  collecting  over 
40%  of  this,  or  $2,241,141,  during  1910  and  1911.  The  fact  appears  to  have  been 
that  substantially  all  the  surplus  earnings  above  8%  on  the  stock  during  the  past 
two  years  were  added  to  the  surplus.  It  was  legal,  and  it  may  have  been  a  wise 
and  proper  atonement  for  the  neglect  to  do  this  in  the  past,  or  for  transferring 
from  reserve  to  surplus  and  distributing,  as  a  stock  dividend,  in  1908,  $4,500,000 
previously  accumulated  to  meet  depreciation. 

The  actual  treatment  of  the  subject  on  the  books  of  the  Company  was  not 
sufficiently  scientific  to  be  a  guide  in  adjusting  rates  for  the  next  five  years. 


40 
Depreciation  in  New  and  Old  Plants. 

In  a  new  plant  which  has  not  yet  reached  its  "gait"  of  renewals,  a  deprecia- 
tion reserve  appears  desirable.  In  the  case  of  a  company  as  old  as  the  Chicago 
Telephone  Company,  the  time  may  soon  arrive  when  renewals  will  take  sufficient 
care  of  depreciation,  as  in  the  case  of  our  older  gas  companies  and  railroads. 

A  depreciation  reserve  has  thus  far  been  needed  by  the  Chicago  Telephone 
Company. 

Methods  of  Building  Up  a  Depreciation  Reserve. 

Where,  as  is  usual  in  telephone  companies,  a  depreciation  reserve  is  invested  in 
the  plant  itself,  there  are  two  methods  of  determining  the  amount  needed  from  year 
to  year  to  reach  the  fixed  amount  at  the  end  of  a  definite  period.  Both  methods 
start  with  an  assumption  of  the  probable  life  and  of  the  value  new  of  each  class  of 
property  that  is  subject  to  depreciation.  The  sinking  fund  method  shows  what 
percentage  new  must  be  put  into  a  fund  at  an  agreed  rate  of  interest,  usually  4%, 
in  order,  when  compounded,  to  reach  the  full  value  at  the  end  of  the  estimated  life 
of  the  property. 

Of  course,  the  only  loss  to  be  made  up  by  the  sinking  fund  is  the  difference 
between  the  cost  new  and  the  net  salvage.  By  net  salvage  is  meant  the  value  of 
the  property  when  scrapped,  less  the  cost  of  its  removal  and  sale. 

Having  thus  determined  the  percentage  of  depreciation  to  be  applied  in  any 
given  year  to  each  class  of  property,  the  amount  of  depreciation  in  dollars  is 
computed.  Then  the  addition  of  these  various  sums  required  for  the  sinking  fund 
gives  the  total  amount  to  be  apportioned  that  year  to  the  depreciation  reserve. 
The  amount  will  vary  from  year  to  year  and  is  a  complicated  method  to  apply  to 
the  bookkeeping  of  the  past.  It  is  of  easier  application  when  applied  to  the  prop 
erty  today  as  an  estimate  for  the  future.  In  the  case  of  the  Chicago  Telephone 
Company,  the  appraisal  just  made  shows  that  the  actxial  excess  of  depreciation  over 
appreciation  in  the  past  thirty  years  has  been  about  $5,000,000.  One  can  determine 
what  uniform  per  cent,  of  the  average  investment  of  all  the  depreciable  property 
would  have  been  necessary  within  the  last  21  years,  in  order  to  reach  at  4% 
compound  interest  this  $5,000,000. 

One  per  cent,  yearly  on  the  average  depreciable  investment  since  1890  at  4% 
would  have  yielded  $3',465,860.91  in  1911.  To  have  secured  $4,000,000  by  this 
method  would  have  required  1.151%;  to  have  secured  the  actual  amount  accumu- 
lated, of  $5,091,000,  would  have  required  1  469%.  The  other  method  of  reckoning 
the  depreciation,  one  apparently  in  universal  use  among  telephone  engineers,  is  the 
so-called  straight  line  method,  where  interest  and  the  compounding  of  the  same  are 
disregarded.  The  difference  between  the  cost  of  the  property  and  the  net  salvage 
— in  other  words,  the  true  depreciation,  is  equally  divided  by  years  over  the  as- 
sumed life  of  the  class  of  property  in  question.  The  amount  yielded  in  this  way 
by  1%  yearly  of  the  average  depreciable  property  of  the  Chicago  Telephone  Com- 
pany since  1890  is  $2,731,977.  To  accumulate  $4,000,000  in  1911  by  this  method 
would,  therefore,  require  1.464%  a  year.  To  accumulate  $5,091,000  would  require 
1.8635%.  A  yearly  addition  to  the  reserve  of  1.5%  would  yield  $4,097,966.  A 
yearly  addition  of  1.86%  would  yield  $5,081,477.  If  the  first  method,  or  sinking 
fund,  is  applied  to  the  past  history  of  the  plant,  the  rate  of  return  must  be 
reckoned  upon  the  first  cost  new  of  the  property  in  use. 

If,  however,  the  second  or  straight  line  method  be  used,  the  rate  of  return 
but  not  the  depreciation  should  be  reckoned  from  year  to  year  on  the  depreciated 
value  of  the  property.  An  illustration  will  make  this  latter  point  clear.  Suppose 
the  property  cost  new  $100,000,  and  that  7%  be  assumed  as  a  fair  return  on  the 
investment,  but  let  it  be  further  assumed  that  the  property  will  last  only  33 -J  years, 
and  therefore  will  require  3%,  or  $3,000  a  year,  without  interest,  to  make  good  the 
depreciation.  Besides  enough  for  operating  expenses,  the  users  pay  $10,000  to  the 
company  the  first  year.  Of  this  amount,  $7,000  is  profit  and  $3,000  makes  good  the 
depreciation.  If  the  company  is  a  growing  one,  it  will  need  even  more  than  $3,000 
for  extensions,  which  it  will  pay  for.  in  part,  with  the  above  $3,000  furnished  by 
its  customers,  and  in  part  through  further  stock  and  bond  issues.  If  $4,000  were 


41 

needed  for  extensions  during  the  first  year  and  $."5,000  were  paid  in  by  the  customer, 
the  real  capital  at  the  beginning  of  the  second  year  would  be  $101,000.  If  no 
addition  to  the  investment  were  required,  the  capital  would  be  $97,000,  and  the 
company  would  have  $3,000  to  put  into  similar  investments  elsewhere.  If  the 
company  could  not  get  7%  elsewhere,  that  would  indicate  that  the  rate  of  return 
to  the  company  in  question  had  been  put  too  high,  since  the  rate  of  return  should 
represent,  as  nearly  as  possible,  what  investors  demand  and  get  in  similar  invest- 
ments under  similar  conditions.  The  objection  may  be  raised  that  if  the  property 
were  a  stagnant  one  the  rate  of  return  each  year,  say  7%,  would  be  on  a  reduced 
capital  and  therefor  the  rates  would  fall  as  compared  with  a  new  investment  of 
similar  character  elsewhere.  This  is  of  slight  importance,  because  the  problem  is 
the  determining  of  what  is  just  in  each  community. 

Under  this  theory,  of  course,  if  a  stagnant  plant  begins  to  grow  rapidly,  and  a 
large  amount  of  new  capital  were  called  in,  or  if  the  plant  were  entirely  rebuilt, 
there  might  have  to  be  a  temporary  increase  of  rates,  but  that,  under  a  system  of 
public,  regulation  and  publicity  of  accounts,  could  be  allowed.  Such  suppositions, 
however,  of  stagnant  plants,  have  little  application  to  most  municipal  utilities  and 
no  application  to  the  Chicago  Telephone  Company. 

In  the  case  of  the  latter  company,  another  argument  is  raised.  This  plant  for 
the  present  may  be  assumed  to  have  cost  the  security  holders — that  is  the  stock, 
bond  and  note  holders— $33,000,000,  and  to  have  cost  the  telephone  subscriber 
$5,000,000  for  a  depreciation  reserve. 

The  Company  claims  that  it  has  had  the  burden  of  investing  and  caring  for 
this  $5,000,000  of  depreciation  reserve,  which  has  been  put  into  extensions,  and 
should  have  a  reward  for  the  same.  To  this  it  should  be  replied,  first,  the  salaries 
of  all  the  officials  and  managers  that  supervised  these  extensions  have  been  paid 
out  of  operating  expenses  and  will  be  so  paid  in  the  future.  Second,  the  security 
to  the  stockholders  has  been  increased  by  this  depreciation  reserve  collected  from 
the  subscriber  and  put  into  extensions.  Third,  if  the  depreciation  reserve  had  been 
placed  in  an  outside  sinking  fund,  the  owners  of  the  property  would  have  had  to 
put  their  hands  into  their  pockets  for  the  extensions  which  have  been  paid  for  by 
the  subscribers,  while  the  total  value  of  the  telephone  property  would  not  have 
been  changed  thereby,  and  the  investment  in  the  sinking  fund  would  have  been 
scarcely  more  secure  than  the  investment  actually  made  in  extensions.  The 
straight  line  method  will  be  followed  in  this  report,  and  the  yearly  depreciation 
will  be  taken  from  the  cost  new  of  the  depreciable  investment. 

Maintenance  and  Depreciation  in  Other  Bell  Companies. 

The  experience  of  the  entire  group  of  Bell  companies  with  their  4,474,171 
stations  in  use  at  the  close  of  1911,  should  be  observed.  The  percentage  of  station 
removals,  maintenance  and  depreciation  to  the  entire  investment  in  telephone 
property  was  given  in  the  last  report  of  the  A.  T.  &  T. : 

1895 9.1% 

1900 8.4% 

1905 8.9% 

1910 9.5% 

1911 9.2% 

In  Chicago  and  suburbs  in  1911,  when  the  average  depreciable  property  of 
$33,277,902  was  89.47%  of  the  total  property  of  $37,194,588,  9.2%  of  the  entire 
property  would  be  10.28%  of  the  depreciable  property.  But  this  9.2%  in  the  other 
Bell  Companies  included  station  removals.  This  item  in  Chicago  in  1911  was 
$730,  107.20,  or  2.194%  of  the  average  depreciable  property,  but  was  only  1.85%  in 
1910,  and  apparently  will  be  about  that  figure  in  1912.  A  reduction  of  1.85% 
from  10.28%  would  leave  8.43%  of  the  depreciable  investment  as  applicable  to 
maintenance  and  a  depreciation  reserve  in  Chicago,  outside  of  station  removals,  if 
the  average  of  all  the  Bell  Companies,  save  the  long  distance  lines,  were  to  prevail 
here.  If  the  long  distance  lines  be  included,  there  is  data  from  the  last  three 
reports  of  the  A.  T.  &  T.  for  a  more  detailed  comparison,  as  follows: 

The  last  report  of  the  American  Telephone  and  Telegraph  Company  gives  not 


42 

only  the  telephone  plant  in  use  on  December  31,  1911,  of  $666,660,702  (p.  13)  for 
the  entire  Bell  system  in  the  United  States,  but  it  gives  the  plant  additions  for 
each  of  the  previous  12  years.  (Eeport,  p.  5.)  The  working  capital  is  omitted, 
but  land  is  included  in  addition  to  the  depreciable  property.  The  report  also 
states  (p.  6) : 

"During  the  year  $58,840,000  was  applied  out  of  revenue  to  maintenance  and 
reconstruction  purposes;  of  this,  over  $12,000,000  was  unexpended  for  those  pur- 
poses. 

"The  total  provisions  for  maintenance  and  reconstruction  charged  against 
revenue  for  the  last  nine  years  was  over  $342,300,000." 

From  this  data  the  following  computation  is  easily  made: 

TABLE  17. 

MAINTENANCE    AND    DEPEECIATION    EXPENSES    AND    EESERVES    OF 
ALL  BELL   COMPANIES,   INCLUDING   LONG   DISTANCE  LINES. 

Description.  1910.  1911. 

Average  plant  investment,  including  land,  but  not 

working  capital,  of  all  Bell  companies $584,208,500.00     $638,830,314.00 

Ditto  for  Chicago  Telephone  Company 30,451,278.00  33,883,648.00 

Other  Bell  companies   553,757,222.00  604,946,666.00 

Total  maintenance,  station  removals  and  deprecia- 
tion reserve 52,028,009.00  58,850,350.00 

Percentage  of  maintenance,  station  removals,  and 
depreciation  reserve  to  average  plant  invest- 
ment, including  land  but  not  working  capital 
in  all  Bell  companies 8.91%  9.21% 

Maintenance,  station  removals  and  depreciation  of 

Chicago  Telephone  Company 3,888,533.00  4,228,221.00 

Percentage  of  maintenance,  station  removals  and 
depreciation  reserve  in  the  Chicago  Company 
to  its  average  plant  investment,  including  land  12.76%  12.48% 

Maintenance,  station  removals  and  depreciation  in 

other  Bell  companies  after  deducting  Chicago.  .  48,139,476.00  54,622,129.00 
Percentage  to  plant  investment  and  land  in  these 

other  companies  8.69%  9.03% 

In  the  above  computation,  the  investment  of  the  Chicago  Company,  as  it 
appears  on  the  books  of  the  company,  is  used.  If  the  property  ($417,871.38,  Hall, 
page  14)  that  was  scrapped  before  the  close  of  1911,  had  been  deducted  from  the 
Chicago  investment,  the  contrast  would  have  been  slightly  increased.  As  it  is, 
however,  the  other  Bell  companies  are  spending  only  about  9%  of  their  entire 
investment  outside  of  their  working  capital  for  both  maintenance,  station  removals 
and  yearly  additions  to  their  depreciation  reserves.  The  Chicago  company,  on  the 
other  hand,  is  spending  or  setting  aside  about  12y2%  for  the  same  purpose.  Some 
allowance  may  be  made  for  the  increased  cost  of  station  removals  here,  but  a 
difference  of  even  3%  when  applied  to  the  investment  of  the  Chicago  company  for 
both  city  and  suburbs  in  1911,  would  amount  to  about  $1,000,000  and  to  the  city 
alone  to  about  $750,000. 


43 

TABLE  18. 

MAINTENANCE,  EECONSTEUCTION  AND  PLANT  INVESTMENT  OF  ALL 
THE   BELL   COMPANIES,    1903-11,    INCLUSIVE. 

Provisions  for 

Average  Maintenance  and 

Year.  Plant  Dec.  31.  Plant  for  Year.         ^Reconstruction. 

1902          $250,205,302 

1903          285,574,002  $267,889,652 

1904          319,010,702  302,342,352 

1905          369,791,602  344,401,152 

1906          449,158,502  409,475,052                  $  30,639,200 

1907          502,079,902  475,619,202  34,665,700 

1908          528,717,102  515,398,502  37,204,200 

1909          557,417,202  543,067,152  44,838,953- 

1910 611,000,002  584,208,600  52,028,009- 

1911          666,660,702  638,830,352  58,840,354 


Total $4,081,232,016  *$342,300,000 

*The  total  for  the  nine  years  is  given  in  the  recent  reports  of  the  A.  T.  &  T., 
but  the  separation  between  the  first  three  of  the  years  is  not  shown. 

The  report  for  1911  gives  the  provision  for  maintenance  and  reconstruction, 
and  the  total  for  the  nine  years,  1903-11,  but  reliance  is  had  upon  the  previous 
reports  for  the  amount  for  some  of  the  years  covered  by  the  total.  The  entire 
provision  for  maintenance  and  station  removals  and  to  meet  depreciation  during 
the  last  nine  years  for  all  the  associated  Bell  companies  of  the  United  States,  has 
been  only  $342,300,000  or  8.387%  of  the  aggregate  of  the  average  investments 
during  those  nine  years  of  $4,081,232,600. 

An  appraisal  of  all  these  Bell  plants  in  1907  gave  a  value  to  these  properties 
of  $35,000,000  in  excess  of  the  obligations  outstanding  against  them.  If  a  main- 
tenance, station  removal  and  depreciation  reserve  expense  of  8.39%  can  do  this 
elsewhere,  it  might  seem  sufficient  in  Chicago  with  its  large  proportion  of  long 
lived  investment.  At  least  8.5%  would  appear  sufficient  for  maintenance  and 
depreciation  reserve,  if  station  removals  be  separately  allowed  in  Chicago. 

Commenting  on  this  situation,  President  Vail,  in  his  report  for  1908,  wrote: 

' '  The  result  of  the  appraisement  and  studies  on  depreciation,  given  below, 
establishes  the  fact  that  our  charges  against  revenue  for  maintenance  and  re- 
construction are  conservative  and  on  the  right  side.  *  *  * 

"There  exists  much  misunderstanding  as  to  the  permanent  value  of  a  modern 
telephone  plant.  Originally,  exchange  plants  were  open  wire  construction,  largely 
on  house-top  fixtures  and  to  a  certain  extent,  on  poles.  The  central  offices  were 
in  leased  buildings,  seldom  fireproof,  the  equipment  was  of  various  types  and 
standards,  due  to  the  rapid  improvement  or  development  then  taking  place. 

"Now  the  central  offices  in  all  the  principal  centers  and  in  many  of  the  less 
important  are  in  fireproof  buildings  built  for  the  purpose  and  owned  by  the 
companies. 

"From  these  offices  radiate  the  underground  conduits  connecting  the  central 
offices  with  each  other  and  the  various  districts  of  the  exchange  territory. 
Through  the  subways  the  wires  are  run  in  cables  of  copper  wire,  sheathed  with 
lead  covering.  The  extensions  of  these  lines  are  open  wire,  generally  copper,  or 
aerial  cables  strung  on  pole  lines  of  substantial  construction." 

Commenting  upon  this  matter  again  in  his  report  for  1910,  President  Vail 
made  the  following  significant  statement: 

"The  present  policy  of  the  Bell  system  is  to  provide  against  every  probable 
contingency  and  to  base  the  amount  and  extent  of  such  provision  on  past  expe- 
rience— not  on  future  expectations.  It  is  conjectured  that  the  future  will  show 
a  decrease  in  the  depreciation  or  reconstruction  due  to  decay,  wear  and  tear,  and 
obsolescence.  Changes — improvements — are  going  on  as  rapidly  as  in  the  past, 
but  the  general  character  of  plant  and  methods  is  assuming  more  permanency. 
The  improvements  are  being  evolved  from,  and  are  being  grafted  on  to,  the  old 


44 

system  and  methods.  The  disturbing  and  sometimes  seemingly  destructive  condi- 
tions following  the  rapid  development  of  high  pressure  power  and  transmission 
have  been  to  a  great  measure  overcome. 

"All  this  has  been  made  possible  through  the  unremitting  study  and  research 
of  the  staff  of  the  engineering  and  experimental  departments  of  the  company, 
who  by  close  attention,  observation  and  study,  anticipate  and  provide  for  all 
such  contingencies  and  conditions  as  can  possibly  be  anticipated  or  provided  for 
in  advance. 

"Under  these  conditions  there  is  a  small  probability  that  any  such  causes 
as  those  which  forced  the  wholesale  reconstruction  or  rearrangement  of  plant 
in  the  past  will  again  occur;  it  is,  however,  for  the  benefit  of  the  public  and  of 
the  corporation  to  have  an  ample  reserve  for  any  contingency  which  may  hap- 
pen." 

That  the  Chicago  Telephone  Company  has  pursued  the  same  conservative 
policy  as  the  other  Bell  companies  is  indicated  in  the  report  of  the  then  president 
of  the  company,  John  M.  Clark,  in  his  annual  report  for  1900.  He  then  said: 

"This  company  has  aimed  to  keep  fully  up  with  the  improvements  that  are 
continually  being  made  in  apparatus  and  in  methods  of  handling  the  business. 
In  fact,  some  of  the  most  important  of  these  have  been  made  by  electricians  and 
experts  in  the  employ  of  this  company. 

"The  expenditures  have  been  largely  increased  not  only  by  the  growing 
cost  of  operation,  but  also  through  the  necessity  of  replacing  old  switchboards 
and  apparatus  with  new  and  improved  equipment,  in  order  to  maintain  the  quality 
of  the  service  at  the  highest  modern  standard.  New  switchboards  and  apparatus 
were  installed  during  the  year,  costing  $282,160.38." 

It  is,  moreover,  interesting  to  note  that  such  well  established  independent 
telephone  companies  as  the  Tri-State  of  Minneapolis,  Keystone  of  Philadelphia, 
Kinloch  of  St.  Louis,  Federal  of  Buffalo,  and  the  Kansas  City  Home  Telephone 
Company,  are  devoting  less  than  8.5%  yearly  of  their  plant  investment  to  main- 
tenance and  depreciation. 

That  the  entire  Bell  system  has  so  completely  taken  care  of  depreciation  with 
a  total  expenditure  of  9%  of  the  plant  investment  for  maintenance,  including 
renewals,  and  for  station  removals  and  for  additions  to  the  depreciation  reserve 
investment  as  compared  with  over  12%  here  during  the  last  two  years,  is 
significant. 

The  fairness  of  the  above  comparison  is  strengthened  by  tbp  fact  that  all  the 
Bell  companies,  including  the  long  distance  lines  had  in  permanent  underground 
conduit  only  53%  of  their  entire  mileage  of  wire  in  December,  1911  and  outside  of 
Chicago  only  51%,  while  the  Chicago  Telephone  Company  had  81%  in  under- 
ground conduits.  This  would  naturally  mean  that  the  maintenance  expenses  would 
be  somewhat  larger  in  the  average  Bell  telephone  company  than  in  Chicago. 

Real  estate  and  underground  conduits  and  cables,  which  constitute  the  most 
permanent  portion  of  the  /telephone  plant,  were  given  in  the  1908  annual  report 
of  the  A.  T.  &  T.  Co.,  as  amounting  to  only  29%  of  the  total  value  of  the  telephone 
plants  owned  by  that  company;  that  is,  the  entire  Bell  system. 

According  to  the  appraisal  of  Byllesby  and  Arnold,  this  portion  of  the  plant 
of  the  Chicago  company  constitutes  39.5%  of  its  entire  investment. 

Rate  of  Return. 

Any  one  familiar  with  the  numerous  decisions  of  rate  commissions  is  aware 
of  how  uncertain  and  vague  are  most  of  their  expressions  upon  the  proper  rate  of 
return.  The  courts  have  been  inclined  to  uphold  any  rate  which  yielded  from 
4%  to  6%  return.  Their  theory  has  appeared  tcr  be  that  if  the  rate  was  as  high 
as  bonds  were  netting  the  investor  in  the  locality,  which  was  usually  from  4% 
to  5!/4%,  the  rate  was  not  confiscatory.  State  commissions  have  held  to  a  higher 
rate. 

New  securities  in  the  lighting  business  in  Massachusetts,  however,  have  been 
ordered  by  the  State  Gas  and  Electric  Light  Commission  to  be  sold  at  such  prem- 
iums as  to  net  the  investor  only  5%  to  6%. 

In  the  case  of  a  large,  old  and  well  established  enterprise,  like  the  Chicago 


45 

Telephone  Company,  the  proper  test  would  appear  to  be  such  rate  of  return  as 
would  render  possible  the  sale  of  additional  stock  and  bonds  when  needed  from 
time  to  time  for  extensions.  In  the  other  words,  the  rate  should  be  such  as  to 
keep  the  securities  at  par,  or  slightly  above.  The  market  for  the  securities  of  a 
well-known  company  is  highly  competitive.  If  investors  are  willing  to  buy  stock, 
on  a  6%  basis,  and  the  company  insists  upon  paying  8%  dividends,  the  investors 
will  quickly  run  up  the  price  to  such  an  amount,  say  133J,  as  will  net  the  investor 
only  6%  on  what  he  pays  for  the  stock.  We  may  argue  that  the  business  is  such 
that  the  investor  ought  to  have  8%;  but  the  investor,  having  his  own  opinion  on 
the  subject,  insists  upon  buying  on  a  6%  basis,  or  whatever  may  be  the  actual 
market  quotation. 

Applying-  these  observations  to  the  local  telephone  situation,  we  find  that 
during  1911  the  Company  had  outstanding  $5,000,000  of  5%  bonds,  which  have  been 
constantly  sold  above  par  since  their  issue  in  1908.  Furthermore,  the  Company 
during  the  present  year  has  made  another  issue  of  $14,000,000  of  such  bonds,  which 
are  also  selling  above  par.  Its  $1,000,000  of  loans  from  the  banks  were  obtained 
at  4%  to  4%%  interest.  The  $27,000,000  of  8%  stock  sold  at  120  to  130  during 
most  of  the  three  years  prior  to  the  exchange  of  nearly  all  of  that  which  was 
owned  by  the  minority  stockholders  in  1911,  for  the  8%  stock  of  the  A.  T.  &  T. 
The  8%  stock  of  the  latter  company  has  been  selling  for  some  time  at  140  to  144; 
yet  this  is  in  the  face  of  the  announcement  in  the  last  report  of  the  A.  T.  &  T. 
that  on  its  capital  and  that  of  the  associated  Bell  companies  it  will  not  hereafter 
expect  or  encourage  more  than  8%. 

Now  an  investor  in  an  8%  stock  at  140  nets  on  the  investment  only  5.71%. 
Even  at  130  he  only  nets  6.15%,  and  at  125  he  nets  6.4%.  An  investor  content 
with  6.5%  return  would  only  pay  123  for  the  stock.  Since  the  stock  has  been 
above  that  price  most  of  the  time  during  the  last  three  years,  it  may  be  inferred 
that  the  investor  in  Chicago  Telephone  Company  stock  not  only  does  not  ask  a 
return  of  6.5%  on  his  actual  investment  in  order  to  buy  it,  but  that  in  the  bidding 
of  the  competitive  market  he  forces  up  the  price  so  that  he  cannot  make  6.5%; 
in  fact,  by  forcing  the  price  above  133,  as  has  been  the  case  recently,  the  investing 
market  makes  it  impossible  to  realize  even  6%. 

To  all  this  it  is  urged  that  the  stock,  at  least  of  the  local  company,  is  more 
precarious  than  the  stocks  of  the  local  gas  or  electric  light  companies,  because  of 
the  existence  of  competition  from  the  Illinois  Tunnel  Company.  That  competition 
has  not  been  serious  thus  far,  and  the  investor,  judging  from  the  above  named 
market  quotations,  evidently  does  not  expect  it  to  be;  neither  do  the  officers  of  the 
Chicago  Telephone  Company  express  any  fear  from  that  source. 

Of  more  force  is  the  claim  that  stockholders  may  pay  more  for  stock  in 
expectation  of  occasionally  having  a  chance  to  buy  new  stock  issues  at  par. 

In  view  of  all  these  facts,  it  would  seem  as  if  6\<>%  to  7%  were  as  reasonable 
a  rate  of  return  for  Chicago  telephone  stock  as  for  the  Consolidated  Gas  Company 
stock  of  New  York,  with  reference  to  which  a  6%  return  was  considered  reason- 
able by  the  United  States  Supreme  Court  in  January,  1909. 

Again  it  is  urged  that  the  City  has  the  right  of  purchase  at  the  appraised 
value  at  the  end  of  the  grant,  or  at  5%  in  excess  of  the  appraised  value  on 
January  1,  1919  and  1924,  and  the  City  may  transfer  its  right  on  the  latter  date. 
As  long,  however,  as  the  Company  gives  good  service  and  is  not  overcapitalized, 
it  seems  to  have  little  to  fear  in  this  direction.  Certainly  an  appraisal  on  the  basis 
of  that  of  Byllesby  and  Arnold  would  involve  a  payment  to  the  stockholders  of  a 
large  premium  in  case  of  city  purchase. 

The  stock  outstanding  was  increased  in  1908  from  $22,500,000  to  $27,000,000, 
without  any  contribution  from  the  stockholders.  To  be  sure,  the  dividends  were 
reduced  at  the  same  time  from  10%  to  8%,  the  total  annual  dividends  remaining 
about  the  same.  The  increase  of  stock  has  been  defended  by  the  Company  on  the 
ground  that  the  accumulations  from  the  subscribers  to  meet  depreciation  were  not 
found  to  be  needed  for  that  purpose,  but  represent  surplus  earnings,  which  could 
be  capitalized.  Whatever  be  said  of  that  procedure,  the  fact  stands  out  that  a 
stockholder  possessed  of  2214  shares  early  in  1908,  became  a  possessor  a  little  later 
of  27  shares. 

Now  a  dividend  of  6%   on  27  shares  is  equivalent  to  7.2%   on  22%   shares. 


46 

Similarly,  a  dividend  of  6.5%  on  27  shares  is  equal  to  7.8%  on  22%  shares,  and 
7%  on  27  shares  is  equal  to  8.4%  on  22i/2  shares. 

Since,  however,  with  the  addition  of  the  $4,500,000  the  outstanding  securities 
of  the  Company  appear  to  be  no  greater  than  the  value  of  the  physical  property, 
a  return  on  the  stock  of  6.5%  to  7%  may  be  reasonable. 

In  all  this  it  must  be  emphatically  asserted  that  a  return  of  6.5%  to  7%  is 
not  here  considered  as  a  fair  return  in  the  early  days  of  the  Telephone  Company, 
when  the  risks  of  developing  a  new  art  were  great.  As  is  elsewhere  shown,  the 
returns  in  those  early  days  were  fully  commensurate  with  the  risks  assumed. 

The  problem  before  us  now  is  not  so  much  an  ethical  problem  of  what  a 
company  ought  to  receive  as  it  is  what  return,  as  a  matter  of  fact,  will  tempt  the 
investor  to  furnish  the  money  needed  for  the  growth  of  the  business.  If  the 
lessons  of  the  stock  market  point  to  5%  on  bonds,  and  to  6.5%  to  7%  on  stock, 
as  sufficient  for  this  purpose,  in  the  case  of  the  Chicago  Telephone  Company,  then 
such  a  rate  of  return  is  reasonable. 

On  December  31,  1911,  there  were  4,474,171  telephones  in  use  among  the  Bell 
companies  in  the  United  States.  Of  this  number,  only  38%  were  managed  by 
companies  paying  8%  dividends.  Outside  of  the  New  York  and  Chicago  com- 
panies only  11%  of  all  the  telephones  were  in  the  hands  of  the  companies  paying 
8%.  No  companies  paid  over  8%,  or,  so  far  as  can  be  learned,  any  amount 
between  7%  and  8%.  Three  companies  in  New  England  and  the  Rockies  paid  7%. 
About  half  of  all  the  telephones  in  the  country  were  owned  by  companies  paying 
over  6%,  but  only  23%  were  owned  outside  of  the  New  York  and  Chicago 
companies. 

The  companies  controlling  the  other  half  of  the  Bell  system  and  located 
largely,  like  the  Central  Union,  in  districts  especially  subjected  to  competition 
from  the  independent  companies,  have  paid  no  dividends,  or  not  to  exceed  6%. 

These  and  the  other  facts  at  hand  lead  to  the  conclusion  that  the  8%  dividends 
from  a  few  of  the  Bell  companies,  notably  New  York  and  Chicago,  together  with 
the  41/4%  payment  on  gross  receipts  from  all  the  companies,  and  the  profits  of  the 
long  distance  business,  help  the  A.  T.  &  T.  to  carry  some  of  the  companies  that  are 
competing  with  the  independent  companies,  or  are  having  other  difficulties. 
Whether  the  Chicago  company  should  thus  collect  from  the  subscribers  here  to 
support  the  parent  company,  which  has  always  owned  over  half  of  its  stock  and 
which  receives  all  of  the  4%%  payment  on  gross  receipts  for  the  benefit  of  the 
stockholders  of  the  National  Company,  or  for  the  benefit  of  .the  telephone  system 
elsewhere,  need  not  here  be  argued. 

Possibilities  of  Reduction. 

It  has  appeared  that  operating  expenses  should  not  include  more  than  $1  per 
telephone  for  payments  to  the  National  Company.  It  has  also  been  shown  that 
the  station  removals  are  very  high,  but  that  in  1912  they  were  beginning  to  fall. 
The  repairs,  which  averaged  about  6.5%,  1904-7,  fell  to  about  5.5%  during  the 
next  four  years,  1908-11.  The  average,  however,  of  all  the  Bell  companies  last 
year,  was  under  4%  of  the  investment.  It  was  under  4%  also  in  the  largest  cities 
outside  of  Chicago.  Local  conditions  may  prevent  for  awhile  a  further  reduction 
here,  but  it  is  reasonable  to  suppose  that  the  present  5.5%  will  approach  4.5% 
and  the  station  removals,  which  are  now  about  2%  in  the  city,  will  decline  to  1.5%. 

The  entire  expenditure  for  repairs,  renewals,  station  removals  and  additions 
to  the  depreciation  reserve  is  over  13%  of  the  average  investment  in  the  city,  as 
compared  with  8.5%  to  9.5%  on  the  average  elsewhere. 

Eepairs  and  renewals  have  been  steadily  falling  from  about  9.5%  twenty 
years  ago  to  7.39%  the  last  three  years,  ending  with  the  close  of  1912.  The 
appraisal  has  shown  that  a  further  expenditure  of  1.86%  annually  of  the  property 
subject  to  depreciation  would  result  in  the  accumulation  of  the  $5,091,000  actually 
collected 

Furthermore,  this  amount  still  leaves  the  investment  intact,  although  about 
•$10,000,000  of  the  appraised  values  of  Byllesby  and  Arnold  were  rejected.  If  this 
$5,091,000  of  depreciation  in  the  property  had  been  accumulated  by  setting  aside 
yearly  a  percentage  that  should  decline  with  the  decline  in  maintenance,  then  the 


47 

percentage  would  have  started  during  the  seven  years,  1891-7,  with  2.77%,  would 
have  fallen  during  the  next  seven  years,  1898-1904,  to  2.06%,  and  during  the  last 
seven  years,  1905-11,  would  have  fallen  to  1.66%,  with  every  prospect  of  a  further 
decline  below  1.5%. 

From  this  point  of  view,  one  could  estimate  the  repairs  and  renewals,  known  as 
maintenance,  at  about  7.4%,  or  at  the  most  7.5%,  during  the  next  two  years,  with 
a  further  addition  to  the  reserve  fund  of  1.5%,  making  a  total  of  9%  for  mainte- 
nance and  depreciation.  This  is  aside  from  the  expense  for  station  removals  and 
changes,  which  keep  the  installation  of  wires  and  fixtures  inside  the  subscriber's 
premises  intact,  and  practically  free  from  depreciation. 

The  matter  may  be  approached  from  another  point  of  view.  We  may  assume 
that  the  average  repairs  for  the  next  five  years  will  be  5%  and  the  amount  neces- 
sary for  the  depreciation  reserve  1.5%,  making  a  total  for  these  two  items  of 
6.5%,  with  a  possibility  of  7%.  There  remains  the  problem  of  renewals.  From 
figures  prepared  by  the  Company  it  appears  that  with  an  average  life  gradually 
increasing  from  twelve  years  in  the  90s  to  nineteen  years  now,  and  with  a  very 
moderate  rate  of  growth,  giving  an  investment  of  $103,000,000  in  1930,  the  renewals 
for  the  next  five  years,  1913-17,  would  average  1.78%  of  the  depreciable  property, 
and  during  the  following  thirteen  years,  2.88%.  The  addition  of  1.78%  for 
renewals  to  the  6.5%  to  7%  already  mentioned  for  repairs  and  depreciation 
reserve  would  give  8.28%  to  8.78%  for  repairs  and  renewals  and  for  an  addition  of 
1.5%  yearly  to  the  depreciation  reserve.  During  the  remaining  thirteen  years  the 
repair  item  might  be  estimated  at  4.5%,  which  is  still  much  higher  than  in  other 
companies.  This,  with  1.5%  for  the  reserve,  and  2.88%  for  renewals,  would  be 
8.88%. 

The  Telephone  Company  does  not  accept  as  long  a  life  today  as  nineteen  years. 
The  appraisal,  however,  used  estimates  of  life  which  amount  to  a  composite  life 
on  all  the  property  of  almost  exactly  nineteen  years,  viz.,  18.961  years.  It  seems 
certain  that  the  whole  tendency  in  the  Chicago  plant  is  toward  reaching  in  a 
comparatively  short  time  the  age  adopted  by  Byllesby  and  Arnold,  if  that  time 
has  not  yet  been  reached. 

Byllesby  and  Arnold  find  that  the  average  depreciation  allowance  on  a 
straight  line  basis  is  4.068%.  If,  however,  they  had  taken  the  allowances  for 
salvage  which  have  been  found  by  the  Chicago  company  to  be  applicable  to  its 
condition  here,  the  salvage  would  have  been  raised  from  22.862%  to  29.234%,  and 
the  annual  depreciation  and  renewal  allowance  on  a  straight  line  basis  on  all  the 
plant  in  service,  including  land,  but  not  including  working  capital,  construction  in 
process,  tools,  teams,  furniture  and  fixtures,  would  have  been  reduced  to  3.732%. 
With  the  almost  certain  continuance  of  the  increase  in  cost  of  labor  and  materials 
and  of  other  increments  of  value  that  are  often  allowed  in  appraisals,  the  rate  of 
depreciation  and  renewals  may  be  kept  down  to  between  3.5%  and  4%,  as  we  have 
seen  has  been  the  experience  of  the  last  twenty  years.  Everything  points  to  an 
allowance  for  maintenance  and  depreciation  of  8.5%  to  9.5%.  At  9%  the  Com- 
pany could  continue  to  pay  5.5%  for  repairs  during  the  next  five  years,  meet  all 
renewals  that  would  come  on  the  assumption  of  a  nineteen-year  life,  such  as  was 
used  by  Byllesby  and  Arnold,  and  would  have  1.72%  for  a  depreciation  reserve 
or  other  extraordinary  expenditures,  or  almost  as  large  an  amount  as  the  1.86% 
of  the  last  twenty  years.  As  already  observed,  this  percentage  might  well  decline 
with  the  decline  of  the  maintenance  account  and  be  taken  at  1.66%  during  the  past 
seven  years. 

With  the  data  at  hand  and  the  conclusion  already  reached  above,  the  operating 
expenses  in  the  city  for  1911  might  be  thus  treated: 


48 

TABLE  19. 

EEVISED  EXPENSES  AND  PROFITS  WITHIN  THE  CITY  IN  1911. 

With  Maximum          With  Minimum 
Description.  Expenses.  Expenses. 

Operating    expenses    $  7,584,289.80  $  7,584,289.80 

Excess  payments  to  A.  T.  &  T.  Co 191,818.00 

Expenses  less   excessive   rentals 7,584,289.80  7,392,471.80 

Expenditures  for  repairs  and  renewals 1,836,506.60  1,836,506.60 

Expenditures  less  repairs  and  renewals 5,747,783.20  5,555,965.20 

Add  for  corrected  repairs,  renewals  and  deprecia- 
tion      2,395,976.35*  2,266,464.12f 

Revised  expenses   : 8,143,759.55  7,822,429.32 

Receipts    10,410,770.59  10,410,770.59 

Profits     '. 2,266,011.04  2,588,341.27 

Conceded    profits    1,765,995.00$  1,513,710.0011 

Remaining  profits    501,016.04  1,074,631.27 

Contingencies  and  surplus 150,000.00  100,000.00 

Possible  reduction  in  rates  aside   from   considera- 
tion of  claims  for  extraordinary  depreciation  351,016.04  974,631.27 

*At  9.25%  of  average  depreciable  property  new  of  $25,902,447. 

f At  8.75%  of  average  depreciable  property  new  of  $25,902,447. 

JTaken  at  7%  of  $25,228,500,  the  latter  being  equivalent  to  such  a  per  cent, 
of  the  $6,000,000  of  bonds  and  notes  and  $27,000,000  of  stock  as  the  total  of 
appraised  property  in  the  city,  new,  was  to  that  in  the  city  and  suburbs. 

^Estimated  at  6%  on  $25,228,500,  the  city  portion  of  the  property. 

The  above  figures  do  not  take  into  account  the  claims  for  extraordinary  de- 
preciation brought  to  the  writer's  attention  during  October,  in  which  month  the 
report  was  being  put  into  final  shape.  Attention  will  be  given  to  it  in  the  pages 
immediately  following.  Aside  from  that  item  the  conclusions  from  the  above  table 
would  be  that  a  reduction  in  the  telephone  rates  of  about  $700,000  could  be  fairly 
made. 

Toll  Earnings  and  Expenses. 

All  the  expenses  of  the  toll  business  in  the  city  are  included  in  the  operating 
expenses  of  the  city  exchange.  The  toll  revenues  include  all  the  money  appor- 
tioned to  the  city  by  the  Company.  A  careful  investigation  of  the  subject  by  Mr. 
Hall,  confirms  this  apportionment,  which  is  like  that  made  by  Arthur  Young  & 
Co.,  accountants,  to  the  Comptroller  of  the  City  of  Chicago,  Walter  H.  Wilson, 
February  9,  1911  (Hall,  pages  50-1). 

The  general  principle  guiding  the  apportionment  of  earnings  is  the  assignment 
to  the  city  of  the  usual  commission  to  the  office  originating  the  call,  together  with 
the  apportionment  of  the  balance  of  the  receipts  on  a  mileage  basis. 

Municipal  Requirements. 

An  important  source  of  extraordinary  expense  to  the  Telephone  Company  in 
the  past  has  been  municipal  requirements.  First  came  the  elevation  of  the  steam 
railroads,  with  large  expenses  required  of  the  Telephone  Company  in  the  relocation 
of  its  wires.  Then  came  various  city  ordinances,  requiring  the  removal  of  poles 
from  the  streets  in  all  but  the  outskirts  of  the  city.  The  expenses  for  these 
purposes  have  been  included  in  the  maintenance  account,  which  has  shown  such 
n  downward  trend  in  the  last  20  years.  The  relocation  and  burial  of  the  wires 
have  diminished  the  expenses  for  maintenance. 

Now  the  Company  claims  that  it  may  be  called  on  during  the  next  five  years 
to  change  all  of  its  conduits  in  the  streets  where  subways  have  been  recommended. 
These  streets  are  given  in  the  joint  report  of  the  Harbor  and  Subway  Commission, 
and  the  sub-committee  of  the  City  Council  Committee  on  Local  Transportation, 


49 

September  10,  1912.  Along  the  56  miles  of  subway  recommended  to  be  built 
during  the  next  five  years  the  Company  claims  it  will  lose,  in  the  value  of 
abandoned  conduits  and  cables,  $1,840,000,  and  another  $250,000  in  temporary 
work  during  subway  construction. 

After  explaining  the  necessity  for  abandoning  not  only  conduit  lines  in  the 
streets  to  be  occupied  by  the  subways,  but  also  "certain  subsidiary  intersecting 
underground  conduit  and  cable  leads  that  now  cross  the  proposed  subway,  the 
Company  estimates  that  the  loss  on  the  underground  conduit  upon  which  there  will 
be  no  salvage  will  be  $1,165,000,  and  the  loss  upon  the  cable  after  deducting  its 
salvage  value  will  be  $675,000.  Since  the  proposed  subways  will  practically  cut 
many  of  the  exchange  districts  in  halves,  the  maintenance  of  sufficient  crossings 
to  give  service  to  all  subscribers  is  estimated  to  cost  $250,000.  These  estimates 
are  based  on  the  present  telephone  plant." 

The  Company  asserts  that  on  account  of  the  installation  of  several  large  sized 
telephone  cables  each  year,  the  cost  above  mentioned  on  account  of  subways  will 
be  increased  $100,000  a  year  for  every  year  of  postponement  of  subway  construc- 
tion. 

While  personally  a  believer  in  subways  for  Chicago,  it  does  not  appear  to  the 
writer  likely  that  the  subway  program  will  be  sufficiently  advanced  to  require, 
within  five  years,  an  expenditure  by  the  Telephone  Company  of  more  than  one- 
fourth  of  this  $2,090,000,  or  say  $500,000.  Surely  no  more  than  this  will  be 
required  during  the  first  three  of  the  coming  five  years.  Any  excess  above  this, 
if  there  be  such,  during  the  last  year  or  two  of  the  period,  might  be  considered  so 
extraordinary  as  to  justify  its  temporary  capitalization. 

In  this  connection  it  may  be  noted  that  when  the  subway  plans  had  not  been 
developed  on  so  large  a  scale  as  shown  by  their  latest  report,  the  chief  engineer 
of  the  Chicago  Telephone  Company  wrote,  on  March  27,  1912,  that  a  comprehensive 
system  of  subways  would  involve  a  loss  of  $2,300,000  to  the  Telephone  Company. 
He  wrote: 

"We  find,  however,  that  the  plans  for  immediate  subway  construction  now 
being  considered  by  the  Subway  Commission  will  involve  only  our  plant  on 
Harrison  street,  between  Fifth  avenue  and  State  street,  on  State  street,  from 
Harrison  street  to  Eandolph  street,  and  on  Randolph  street  from  State  street  to 
Fifth  avenue,  and  a  few  crossings  at  other  locations.  The  value  of  telephone 
plant  which  will  be  destroyed  by  the  subway  work,  involved  in  these  plans  is  at 
least  $200,000. 

' '  That,  you  may  get  some  quantitative  idea  of  the  problem,  I  would  advise 
that  we  will  abandon  on  Harrison  street  thirty-two  manholes  and  two  conduit 
runs,  which  now  consist  of  from  twelve  to  twenty  duets  each.  Also  we  will 
abandon  about  22,000  feet  of  cable. 

"In  State  street  we  will  abandon  fifteen  manholes  and  a  run  of  conduit  be- 
tween Madison  and  Van  Buren,  with  a  cross-section  of  six  ducts.  We  will  abandon 
also  in  this  street  about  2,400  feet  of  cable. 

"We  will  also  have  fifteen  crossings  to  reroute  on  Harrison,  State  and  Ran- 
dolph streets.  It  is  planned  that  we  will  require  probably  seven  new  crossings." 

Extraordinary  Depreciation. 

Aside  from  the  startling  claim  of  the  Company  that  its  subscribers  should 
pay  to  it,  during  the  next  five  years,  $2,090,000  for  expenses  on  account  of  the 
proposed  subways  and  $100,000  a  year  for  every  year's  postponement  of  such 
construction,  another  $4,216,000  is  claimed  on  account  of  extraordinary  deprecia- 
tion. The  magnitude  of  these  claims  was  first  brought  to  the  writer 's  attention  in 
letters  from  the  Company  October  1st  and  5th.  Previous  letters  and  conversations 
had  referred  only  to  an  expense  of  about  $200,000  on  account  of  subways  and  to 
the  substitution  of  some  new  switchboards  and  the  abandonment  of  two  or  three 
central  exchanges.  The  present  claim  of  the  Company,  as  put  in  final  shape  in  the 
enclosed  letter  of  October  10th,  has  necessitated  a  few  days'  further  examination. 
The  letter  from  the  Company's  chief  engineer  is  given  in  full: 


50 


Prof.  E.  W.  Bemis, 

City  Hall,  Chicago. 
Dear  Sir: 


"Oct.  10,  1912. 


Extraordinary  Depreciation. 

We  have  reviewed  carefully  our  figures  submitted  in  letters  to  you  of  October 
1st  and  5th  on  extraordinary  depreciation  and  would  like  to  make  some  modifica- 
tions which  I  believe  will  more  clearly  represent  the  true  costs  involved.  The 
losses  involved  in  the  abandonment  of  buildings  and  switchboards  because  of 
inadequacy  or  improper  location  are  as  follows: 

TABLE  A. 


Original 
Cost. 
398,000 

Net 
Salvage. 

Loss. 
$    398,000 

Main  &  Franklin  C   O    equipment  

396,000 

$100,000 

296,000 

Central-Randolph  building  

159,000 

100,000 

59,000 

Central  C  O   equipment     

388,000 

98,000 

290,000 

Randolph  C   O    equipment  

304,000 

152,000 

152,000 

Harrison  C.  O.  equipment  

400,000 

100,000 

300,000 

Calumet  building    

42,000 

42,000 

Calumet  C    O    equipment           

123,000 

31,000 

92,000 

Irving  Park  building  

21,000 

10,000 

11,000 

Irving  Park  C.  O.  equipment  

65,000 

33,000 

32,000 

West  Pullman  building  

13,000 

6,000 

7,000 

West  Pullman  C   O.  equipment  

41,000 

10,000 

31,000 

Rogers  Park  

50,000 

25,000 

25,000 

Morgan    Park,    Washington   Heights   and 
Longwood   

8,000 

2,000 

6,000 

Total  $ 

2,408,000 

$667,000 

$1,741,000 

Net  loss  on  conduit  abandoned  in  above  .  .  , 

85,000 

Net  loss  on  II.  G.  cable  

90,000 

Total    $1,916,000 

The  introduction  of  the  semi-automatic  switchboard  which  you  and  I  saw  in 
New  York  last  spring  will  also  result  in  the  abandonment  of  the  "~B"  boards  and 
the  reconstruction  of  the  "A"  boards  in  all  other  offices  as  estimated  in  the  follow- 
ing statement: 

TABLE  B. 

Original  cost  of  Chicago  central  office  switchboards  not  included  in  above 

statement     $3,000,000 

Salvage 700,000 


Loss  on  account  of  semi-automatic  switchboard $2,300,000 

The   following  table  will   show '  in   detail   how  we   estimate   the   salvage   of 
$700,000  in  Table  B: 


51 

TABLE  C. 

Total  answering  jacks,  all  Chicago  exchanges 140,000 

Total  answering  jacks  in  offices  of  Table  A 40,000 

Total  answering  jacks  in  offices  of  Table  B 100,000 

Total  "A."  sections,  all  Chicago  offices 407 

Total  "  A  "  sections  in  Table  A 154 


Total  "A"  sections  in  offices  of  Table  B 253 

Salvage  on  100,000  answering  jacks  at  $7 $700,000 

Salvage  on  253  switchboard  frames  at  $250 63,000 


Gross  Salvage   $763,000 

Cost  of  remodeling  253  "A"  sections  at  $200 50,000 

"Net  salvage   $713,000 

(Say  $700,000.) 

In  addition  to  the  above  noted  losses  on  buildings  and  central  office  equipment 
which  the  Company  must  face,  large  sums  will  be  involved  in  the  loss  of  conduit 
and  underground  cables  should  the  City  go  ahead  with  the  subway  system  now 
planned.  These  losses  will  aggregate  $1,165,000  for  conduit  and  $675,000  for 
underground  cable,  at  total  of  $1,840,000. 

In  addition  to  the  above  amount,  which  covers  the  direct  loss  of  plant  des- 
troyed, it  would  be  necessary  to  do  a  large  amount  of  temporary  work  during  the 
construction  of  the  subways  in  maintaining  crossings,  etc.,  over  the  obstructed 
streets.  In  a  number  of  instances  the  proposed  subways  will  practically  cut  our 
exchange  districts  into  halves,  and  it  will  be  necessary  of  course  at  all  times  to 
maintain  sufficient  crossings  to  enable  us  to  give  service  to  all  subscribers.  We 
estimate  that  this  item  will  amount  to  $250,000. 

These  two  items,  of  direct  loss  on  plant  destroyed  and  the  expense  incident 
to  maintaining  service  during  actual  subway  construction  work,  together  amount 
to  $2,090,000,  and  this  figure  would  represent  the  estimated  total  loss  to  the 
Telephone  Company  on  account  of  the  construction  of  passenger  subways  in  these 

streets. 

I  have  summarized  the  extraordinary  reconstruction  in  the  above  tables  in 
the  following  table: 

TABLE  D. 

Building  and  switchboards  abandoned  on  account  of  inadequacy  of  being 

not   well  located    $1,916,000 

Additional   central   office   switchboards  to   be   abandoned   on   account   of 

semi-automatic    2,300,000 

Underground  conduits  to  be  abandoned  on  account  of  subway  construction  1,165,000 

Net  loss  on  underground  cables  on  account  of  subway  construction 675,000 

Cost  of  maintaining  service  in  cables  during  construction 250,000 


Total $6,306,000 

All  of  the  above  estimates  have  been  made  on  the  basis  of  the  present  tele- 
phone plant.  As  this  plant  is  growing  rapidly,  delays  in  the  subway  work  or  in 
the  adoption  of  the  semi-mechanical  switchboard  or  for  any  other  reason,  will 
result  in  substantial  increases  in  investment  for  switchboards  in  the  offices  in- 
volved, and  for  cables  in  the  streets  involved  in  subway  construction,  and  cor- 
responding increases  in  the  losses  which  must  be  met.  I  would  expect  these  to 
increase  at  not  less  than  $150,000  per  year. 

Yours  trulv, 

"  j.  a.  WEAY, 

JGW:GN  Chief  Engineer." 


52 

It  will  be  observed  that  this  estimates  an  extraordinary  expense  during  the 
next  five  years  of  $6,306,000.  Deducting  the  $2,090,000  on  account  of  subways, 
there  remains  $4,216,000  because  of  the  proposed  abandonment  of  certain  buildings 
and  central  office  equipment. 

This  matter  appeared  so  serious  that  the  writer  felt  justified  in  delaying  the 
report  until  he  could  visit  all  the  properties  which  it  was  proposed  to  scrap.  We 
will  here  consider  them  in  the  order  in  which  the  chief  engineer  of  the  Company 
believes  they  should  be  changed  or  scrapped. 

The  scrapping  of  certain  buildings  with  their  equipment,  in  order  to  put  up 
better  buildings  or  change  the  location  of  the  exchanges,  will  be  first  considered. 
We  will  then  take  up  the  displacement  of  other  central  office  equipment  to  make 
room  for  the  semi-mechanical  or  semi-automatic  switchboards. 

A  Displacement  of  Office  Buildings  and  Equipments. 

The  proposed  improvements  and  changes  will  be  considered  below  in  the 
order  which  the  chief  engineer  holds  will  be  followed  in  actual  reconstruction: 

1.  Harrison    Central    Office    Equipment.      This    equipment    of    about    17,389 
'phones  will  soon  be  transferred  to  the  new  Wabash  Exchange  on  Federal  street. 
The  Harrison  Exchange  is  in  a  rented  building  and  some  of  the  switchboards  are 
fourteen  years  old  and  somewhat  worn.     After  allowing  $100,000  for  salvage,  the 
net  cost  of  the  property  discarded  plus  the  cost  of  moving  are  estimated  by  the 
Company  to  involve  a  net  loss  of  $300,000. 

2.  The    Central   Exchange.      This   is    a   rented   building    with    about    14,000 
'phones   and   is   to   be   transferred   within   two   or   three   years   to   the   adjoining 
building   known   as   the   Eandolph   Exchange,    on   the   south    side   of   Washington 
between    Clark    and    Dearborn.      Some    of    these    switchboards    were    installed    as 
early  as  1898,  but  some  are  only  six  or  seven  years  old,  with  the  latest  equipment. 
The   net   cost   of   this   removal,   from   Central   to   Randolph,   is    given   as    another 
$300,000. 

3.  The  Morgan  Park,  Washington  Heights  and  Longwood  Exchanges.     These 
exchanges,  with  only  1,152   'phones  in  the  aggregate,  occupy  the  second  floor  of 
rented   buildings   in   the   southwestern   part    of   the    city.      They   are   to    be   con- 
centrated in  a  single  exchange  at  a  net  cost  of  $6,000. 

4.  The  Irving  Park   Exchange.     This  is  located   on  Irving  Park  boulevard, 
near  42d  avenue,  and  has  5,138   'phones.     It  is  said  ,to  be  located  too  far  west  for 
the  district,  whose  growth  is  eastward.   The  loss  in  removal  from  this  well-equipped 
station  and  good  building  owned  by  the  Company  is  given  as  $31,000. 

The  cost  of  the  four  changes  above  described  is  estimated  by  the  Company  at  a 
total  of  $629,953,  but  they  also  claim  a  further  expense  during  the  next  five  years 
of  $1,011,047,  as  follows: 

5.  The   Rogers   Park  Exchange.     This  supplies  2,846  telephone  stations   and 
is  located  near  Clark  street  and  Lunt  avenue,  on  the  north  side.     The  Company 
claims  that  it  is  too  far  north  and  that  it  should  be  abandoned,  at  an  expense  of 
$30,000. 

6.  The  Calumet  Exchange.     This  is  near  22d  street  and  Michigan  boulevard 
and  supplies   about   8,048   stations.     It   is   well  equipped,   but   is   in   a   rear   brick 
building  which  may  be  too  small  if,  as  is  expected,  business  develops  more  rapidly 
in  this  section  than  has  hitherto  been  the  case.     Instead  of  the  rear  building,  the 
Company  desires  to  tear  down  the  row  of  residences  which  they  own  in  front  of 
the   building  now  occupied  by   the   exchange   and  put   up   a   large   new   building. 
The  prospect  of  doing  this  within  the  next  five  years  does  not  appeal  to  the  writer 
as  very  certain. 

7.  The  Central-Randolph  and  Randolph  Exchanges.     Still  less  likely  of  im- 
mediate accomplishment  appears  the  proposition  of  scrapping  the  entire  Randolph 
Exchange,   and   the   Central   Exchange,   which   is   to   be    transferred   soon   to    the 
Randolph,  the  idea  being  to  put  everything  downtown  into  the  Wabash  and  Main 
Exchanges,   at   a   cost   for   scrapping   and   removal   of   $263,000.     The   building   is 
comparatively    new    and    is    owned    by    the    Company,    and    serves    about    13,000 
stations. 

8.  Main  Office  Building.     Next  in  point  of  time  is  the  proposed  replacement 
of  the  main  office  building  on  Washington  street,  with  its  16,653  telephones,  by  a 
much  higher  building  that  will  provide  room  for  growth,  and  be  in   other  ways 
better  fitted  for  the  needs  of  the  Company.     The  net  depreciation  on  the  present 


53 

building  and  its  equipment  is  estimated  by  the  Company  at  $694,000.  The 
decision  to  make- this  change  within  the  next  five  years  has  not  been  reached  and 
does  not  appear  sufficiently  probable  to  justify  its  inclusion  in  the  present  esti- 
mates. 

9.  The  West  Pullman  Exchange.  This  exchange,  with  about  3,092  'phones, 
is  well  housed  in  a  building  owned  by  the  Company,  but  a  new  location  a  mile 
further  northwest  is  thought  desirable.  The  loss  in  the  transfer  is  computed  at 
$3,300,  but  the  Company  considers  that  this  can  come  later  than  the  changes  in 
the  main  building.  It  may  be  omitted  from  any  consideration  at  present. 

If  all  the  nine  exchanges  were  to  be  removed  or  scrapped,  the  Company 
estimates  a  net  loss  in  abandoned  conduit  and  cable  of  $175,000.  This  added  to 
the  $1,741,000  loss  on  buildings  and  equipments  means  a  total  loss,  according  to  the 
Company,  of  $1,916,000  from  the  proposed  changes  in  the  above  central  stations. 
The  Company,  however,  has  made  a  mistake  of  much  importance  in  its  computa- 
tions. The  Company  has  reached  its  estimate  of  losses  by  a  deduction  of  the  esti- 
mated salvage  from  what  it  calls  the  original  cost  in  each  case.  The  figures  given, 
however,  are  not  the  original  cost,  but  are  the  higher  appraised  value  new  of 
Byllesby  and  Arnold. 

But  a  larger  mistake  than  that  was  made.  Byllesby  and  Arnold  depreciate 
by  $901,964  the  buildings  and  office  equipments  which  it  is  proposed  to  scrap. 
Since  this  depreciation  was  made  up  by  the  depreciation  reserve  already  discussed, 
only  the  depreciated  value  less  the  salvage  can  now  be  considered.  Making  this 
correction  on  buildings  and  equipments  and  in  the  same  manner  about  20%  on  the 
conduits  and  cables,  there  is  left  only  about  $800,000  of  net  loss  instead  of 
$1,916,000  in  case  all  these  exchanges  are  abandoned  within  the  next  five  years,  as 
suggested.  If  only  the  first  six  of  the  exchanges  named  are  thus  abandoned, 
which  appear  to  be  the  only  ones  definitely  determined  upon,  the  loss  after 
deducting  the  accumulated  depreciation  reserve  on  the  particular  property  in 
question  would  not  exceed  $350,000,  while  if  Eogers  Park  and  Calumet  are 
undisturbed  the  loss  will  not  exceed  $250,000. 

The  Company  does  not  claim  that  in  most  cases  they  are  under  the  necessity 
of  removing  these  exchanges  except  to  secure  greater  economies  in  future 
construction  and  operation.  It  may  safely  be  assumed  that  any  expense  incurred 
beyond  the  $350,000  will  come  back  to  the  Company  and  the  subscriber  in 
economies  of  one  kind  or  another. 

In  taking  this  position,  no  reflection  is  intended  upon  the  sincerity  or  wisdom 
of  the  Company  in  looking  forward  to  all  these  changes  as  desirable.  Probably 
most  of  them  will  come  in  time.  The  only  question  is  as  to  how  soon. 

v  B.     Semi-Mechanical  Switchboards. 

The  A.  T.  •&  T.  has  been  making  successful  use  in  its  laboratory  building  in 
New  York  of  a  new  switchboard  sometimes  called  the  semi-mechanical,  sometimes 
the  semi-automatic,  which  will  render  possible,  it  is  claimed,  not  only  cheaper 
operation,  but  better  service.  A  central  station  is  soon  to  be  equipped  in  the 
East  with  a  new  board.  If  it  continues  to  work  successfully  the  chief  engineer 
of  the  Chicago  Telephone  Company  expects  that  some  boards  can  be  secured  in  a 
year  and  a  half  or  two  years  for  Chicago. 

This  is  the  basis  for  the  estimate  of  the  Company  that  they  will  displace 
$3,000,000  worth  of  central  office  switchboards,  at  a  net  loss  of  $2,300,000,  during 
the  next  five  years,  or  practically  in  the  last  three  years  of  the  five-year  period, 
and  thus  make  room  for  the  new  board.  The  writer  does  not  see  his  way  to 
adding  anything  to  the  operating  expenses  of  the  Company  on  this  account.  The 
practicability  of  the  new  switchboard  is  as  yet  to  be  determined.  So  far  as  the 
new  board  may  be  introduced  it  is  likely  to  reduce  the  operating  expenses  enough 
to  cover,  in  a  reasonable  time,  the  depreciation  charged. 

About  25%  of  the  operators  are  at  the  so-called  B  boards,  which  would  be  no 
longer  needed  with  the  new  switchboards.  Operators'  wages  average  $6.76  per 
year  per  station.  One-fourth  of  this,  or  $1.69  would  be  saved,  if  the  Company's 
claims  for  the  new  switchboard  prove  true.  The  saving  on  the  400,000  telephones 
which  will  be  in  use  in  the  city  by  the  Company  by  1915  would  be  $676,000  a 


54 

year.  It  would,  therefore,  seem  proper  for  the  savings  from  the  new  board  to 
pay  for  its  introduction,  which  at  this  rate,  it  would  speedily  accomplish,  rather 
than  to  treat  the  possibility  of  introducing  this  board  as  a  factor  in  the  fixing 
of  rates  today.  The  new  switchboard  may  cost  more  than  the  old,  but  any 
increased  interest  thereon  would  leave  intact  much  of  the  above  saving  of  over 
$600,000  a  year. 

Furthermore,  the  appraisers  have  written  off  from  the  present  switchboards 
under  discussion  over  $800,000  which  is  already  provided  for  in  the  depreciation 
reserve.  This  will  reduce  the  amount  that  would  have  to  be  raised  from  other 
funds  to  about  $790,000. 

Conclusions  on  Extraordinary  Depreciation. 

If  subways  should  entail  a  $500,000  cost  upon  the  Company,  and  if  a  further 
loss  of  $250,000  in  comparison  with  the  present  appraised  value  is  incurred  in 
the  abandonment  or  removal  of  many  of  its  central  exchanges,  or  a  total  of 
perhaps  $750,000,  this  might  mean  a  further  burden  upon  the  subscriber  of  $150,000 
a  year  for  the  next  five  years.  It  is  quite  possible,  however,  that  the  subway 
cost,  when  it  comes,  could  be  wisely  capitalized.  With  the  growth,  moreover,  in 
revenues  and  the  larger  growth  that  might  come  from  a  reduction  in  charges, 
the  above  mentioned  burden  would  not  necessarily  be  followed  by  such  a  reduction 
in  the  earnings  of  the  Company  as  might  at  first  thought  be  expected.  It  is 
indeed,  possible  that  these  anticipated  burdens  will  not  materialize  to  any  more 
serious  degree  than  those  which  the  Company  has  met  in  the  past  without  any 
considerable  increase  in  expenses  or  reduction  in  its  depreciation  reserve. 

Results  of  the  Ordinance  of  1907. 

In  1906  and  1907  large 'reductions  were  made  in  telephone  rates.  No  attempt 
has  been  made  to  go  back  of  1900,  but  since  January  1  of  that  year  the  chief 
changes  have  been  as  follows: 

Flat  rate  business  'phones  were  charged  $175  a  year  in  parts  of  the  city 
outside  of  the  business  center,  until  1906,  when  a  court  decision  led  to  the  reduc- 
tion of  this  rate  to  $125.  At  the  same  time,  in  1906,  the  charge  of  $175  for  a 
copper  metallic  circuit,  or  two-wire  system,  was  reduced  to  $125,  and  the  grounded 
one-wire  circuit  disappeared. 

The  above  changes  meant  a  reduction  of  $50  to  all  flat  rate  users  having 
return  metallic  circuit  and  a  reduction  of  $50  to  every  flat  rate  business  user 
outside  of  the  center  of  the  city. 

On  December  1,  1907,  the  flat  rate  line  residence  'phones  were  reduced  from 
$100  to  $72,  while  the  two-party  line  was  reduced  from  $75  to  $56-  and  the  four- 
party  line  at  $60  was  abolished.  The  four-party  line  users  could  secure  a  two- 
party  line  at  $4  less  than  the  four-party  line  had  cost. 

Message  rates  were  reduced  from  1,000  messages  for  $95  in  1906  to  $80  in  1907 
for  the  same  number  of  messages,  and  $60  thereafter.  The  charge  for  3,000 
messages,  similarly  fell  from  $162  in  1906  to  $150  in  1907,  and  $114  in  1908,  while 
for  5,000  messages  it  fell  from  $222  in  1906  to  $210  in  1907,  and  $160  in  1908. 

Extension  'phones  which  had  been  $12  to  $30  in  1905,  were  reduced  to  $6  in 
December,  1907. 

On  nickel  'phones  great  reductions  were  made  in  1907.  Instead  of  guarantee- 
ing 10  cents  a  day  and  securing  two  messages  on  a  ten-party  line,  a  business  man 
now,  for  12%  cents,  can  have  two  messages  a  day  on  a  two-party  line  and  extra 
messages  at  5  cents  each.  On  a  two-party  nickel  line  a  business  man  formerly 
must  guarantee  20  cents  securing  thus  four  messages.  He  is  now  charged  the 
same  amount  on  a  single  party  nickel  line. 

In  case  of  residences,  a  person  now  guaranteeing  a  nickel  a  day  has  the  use 
of  a  four-party  line,  while  before  December,  1907,  he  had  only  the  use  of  a  ten- 
party  line  for  the  same  charge. 

A  subscriber  to  a  neighborhood  exchange  formerly  paid  10  cents  toll  for 
telephoning  to  anybody  outside  of  his  exchange,  while  a  person  outside  telephoning 


55 


him  must  also  pay  10  cents;  but  since  December  1,  1907,  the  charge  to  the  neigh- 
borhood exchange  subscriber  was  reduced  to  5  cents  and  no  charge  was  made  to 
any  other  subscriber  within  the  city  limits  for  telephoning  messages  to  the 
neighborhood  exchange  subscriber. 

The  total  reduction  in  earnings  per  telephone  was  from  $49.74  in  1906  to 
$39.72  in  1908.  This  total  fall  of  $10.02,  if  multiplied  into  the  number  of  tele- 
phones in  use  at  the  close  of  1908  t>f  231,180,  would  mean  a  reduction  of  over 
$2,300,000  that  took  place  in  the  city  and  suburbs — mostly  in  the  city — during 
those  two  years.  This  decline  in  revenue  per  telephone,  together  with  the  cost 
of  transforming  the  10-party  to  4-party  lines,  made  a  considerable  reduction  in  the 
ratio  of  net  earnings  to  investment. 

The  net  return,  before  making  any  allowance  for  additions  to  the  depreciation 
reserve,  fell  from  13.82%  in  1906  to  7.10%  in  1908.  The  dividends,  however,  were 
not  affected,  but  during  1908  and  1909  nothing  was  added  to  the  depreciation 
reserve.  The  growth  of  business  and  earnings  was  so  great  in  1910  and  1911  that 
over  $1,000,000  a  year  in  the  city  and  suburbs  was  put  into  the  depreciation 
reserve  in  addition  to  the  regular  8%  dividend. 

The  earnings  before  deductions  for  depreciation  reserve  bore  the  following 
relation  to  the  average  investment  as  shown  by  the  books  during  the  year  in 
question.  The  number  of  telephones  at  the  end  of  each  year  is  also  given  for 
city  and  suburbs: 

TABLE  No.  20. 


EAKNINGS  AND  TELEPHONES  SINCE   1904. 


Eatio 

Earnings  to 
Investment. 
(Per  Cent.) 

1905   14.60 

1906  .  13.82 


Year. 


1907 
1908 
1909 
1910 
1911 


8.12 
7.10 
8.25 
9.89 
9.89 


Number  of 
Telephones. 

143,223 
170,834 
202,681 
231,180 
262,359 
300,618 
335,652 


Improvement  in  the  Service. 

The  public  have  a  right  to  be,  and  are,  as  much  interested  in  good  service  as 
in  low  rates.  Poor  service,  with  resulting  dissatisfaction,  even  ^though  accompanied 
with  a  saving  in  operating  expenses,  is  no  benefit  in  the  long  run  to  a  company. 

Widely  diverse  opinions  prevail  in  the  city  as  to  the  success  of  the  Company 
in  trying  to  give  good  service.  No  system  of  regulation,  however,  which  stops 
short — as  all  regulation  everywhere  has  done — of  allowing  the  public  regulating 
body  to  appoint  both  the  manager  and  a  majority  of  the  board  of  directors,  would 
promise  any  complete  solution.  Such  a  solution  might  easily  involve  other  diffi- 
culties as  great  as  those  removed  by  it,  and  anyway  need  not  be  considered  as 
needed  or  practicable  in  Chicago. 

Something,  however,  could  and  should  be  done.  Some  means  should  be  devised 
for  better  protection  to  the  public  against  possible  carelessness  and  give  it  greater 
confidence  that  its  just  complaints  are  being  properly  met. 


City  Telephone  Bureau. 

It  would  be  to  the  advantage  alike  of  the  Company  and  of  the  public  if  the 
city  maintained  a  properly  equipped  bureau  for  receiving  and  investigating  all 
complaints  of  service.  Telephone  users  often  believe  that  they  cannot  secure 
proper  consideration  of  their  grievances,  and  so  do  not  attempt  to  present  them, 
but  disseminate  somewhat  widely  among  their  friends  their  opinion  of  the 
company. 


56 

If  such  a  bureau  were  open  for  all  complaints  and  took  them  up  promptly 
with  the  Company,  the  latter  would  soon  be  spurred  on  by  public  opinion  to 
approve  any  conditions  that  could  easily  be  improved.  If  this  could  be  done,  the 
bureau's  reports  to  the  Council  would  doubtless  be  followed  by  efficient  action. 
Provided,  as  the  evidence  seems  to  show,  that  the  Company  really  desires  to  give 
good  service,  such  a  bureau  would  be  a  great  help  also  to  the  Telephone  Company. 
The  latter  would,  in  some  cases,  learn,  and  ttus  more  speedily  improve,  the  weak 
points  in  the  system,  and  in  other  cases  it  would  doubtless  convince  the  bureau, 
and  through  the  latter  the  public,  that  some  of  the  complaints  were  not  well 
founded. 

There  is  ample  precedent  for  such  a  course  by  the  city  in  the  offices  which  are 
now  being  maintained  for  the  inspection  of  gas  and  electricity  and  traction 
service.  If  desired,  the  scope  of  the  bureau  could  include  the  systematic  gathering 
of  information  so  that  couucilmanic  action  may  be  easier  when  it  next  becomes 
necessary,  five  years  hence,  to  fix  the  rates.  Such  investigations  are  constantly 
being  made  for  the  Massachusetts  Highway  Commission,  which  controls  the  New 
England  Telephone  and  Telegraph  Company. 

The  present  telephone  ordinance  (Sec.  2)  lodges  some  of  the  work  here  pro- 
posed with  the  City  Comptroller,  but  it  does  not  go  far  enough.  It  gives  him  the 
right  to  examine  the  accounts  and  records  of  the  Company,  but  does  not  appear 
to  create  any  complaint  department  or  intermediary  between  the  public  and  Com- 
pany, such  as  is  now  proposed.  Whether  the  power  of  the  Comptroller  should  be 
increased  to  cover  the  whole  subject,  or  whether  the  work  should  be  given  to  the 
City  Electrician,  to  the  Secretary  of  the  Gas,  Oil  and  Electric  Light  Committee,  or 
some  one  else,  is  a  question  both  of  law  and  policy  upon  which  no  opinion  is  now 
expressed. 

Measured  Service  for  Residences. 

While  the  present  report  does  not  take  up  specified  changes  in  rates,  but  only 
the  question  of  whether  the  rates  as  a  whole  can  be  changed  and  how  much,  it  is 
nevertheless  important,  and  in  accordance  with  the  desire  of  the  Committee,  that 
a  reference  be  made  to  three  other  subjects,  nickel  'phones,  subscribers'  meters 
and  the  character  of  the  service. 

The  nickel  coin  box  is  popular  and  needed  in  drug  stores  and  many  other 
public  places.  In  many  residences  it  is  also  desired.  This  is  especially  true  where 
there  is  danger  of  abuse  by  neighbors  imposing  on  the  good  nature  of  the  tele- 
phone subscriber,  or  where  it  is  desired  to  pay  5  cents  per  call  rather  than  to 
pay  for  a  month 's  use  at  one  time: 

On  the  other  hand,  some  are  much  opposed  to  the  nickel  'phones,  and  a  con- 
siderable portion  of  the  subscribers  to  the  2-party  and  4-party  nickel  'phones  in 
residences  apparently  would  be  better  pleased  to  pay  for  their  calls  by  the  month 
without  any  use  of  nickels  or  slugs.  Such  a  service  is  offered  in  some  other  large 
cities  in  the  form  of  a  measured  residence  service  for  either  1-party,  2-party  or 
4-party  lines.  It  is  believed  that  a  rate  can  be  adopted  sufficiently  attractive  to 
enable  those  who  are  dissatisfied  with  the  nickel  'phones  to  take  the  new  service. 
A  certain  payment  per  month  would  be  guaranteed,  and  all  calls  in  excess  of  what 
that  amount  calls  for  at,  say,  5  cents,  would  be  paid  for  at  the  end  of  the  month 
as  in  the  case  of  the  nickel  'phones;  or,  a  readiness  to  serve  charge  per  month  could 
be  made,  and  a  lower  calling  rate  than  5  cents  could  be  adopted. 

Meters. 

The  Company  has  already  equipped  a  large  portion  of  its  present  measured 
service  lines,  which  are  chiefly  on  business  places,  with  meters  at  the  central 
offices,  known  as  Central  Office  Message  Registers,  and  expects  to  finish  the  entire 
installation  within  four  months.  A  meter  for  the  use  of  subscribers,  whether  busi- 
ness or  residence,  who  have  a  single-party  measured  line,  has  been  developed  by 
the  A.  T.  &  T.  and  sufficiently  tested  on  about  200  business  premises  in  Chicago 
to  show  that  it  is  practicable. 

When  the  Maryland  Public  Service, Commission  issued  an  order,  some  months 


57 

ago,  for  abolishing  all  flat  rate  business  lines — an  order  whose  execution  has  been 
postponed  pending  further  investigation — it  was  provided  that  any  parties  who 
desired  one  of  these  meters  could  have  it  on  payment  of  25  cents  a  month,  or 
$3  a  year.  The  Commission  investigated  the  meters  on  the  market  and  considered 
the  one  offered  by  the  A.  T.  &  T.  to  be  the  best  and  most  reliable.  The  cost  of 
$3  a  year  was  considered  by  the  Commission  to  be  only  a  fair  payment  for  the 
investment  and  for  the  care  and  depreciation  of  the  same.  Not  one  per  cent, 
of  those  who  were  expecting  to  come  immediately  under  the  metered  service  ever 
applied  for  a  meter. 

Very  few  using  the  meters  in  this  city  think  there  is  sufficient  evidence  of 
mistakes  in  the  bills  of  the  Company  to  warrant  their  bothering  to  have  the  de- 
vice, even  if  free.  Very  few,  indeed,  express  any  belief  that  it  is  useful  enough 
to  warrant  their  paying  even  the  small  rental  for  it. 

Under  these  circumstances  it  would  seem  a  mistake  to  burden  the  rates  of  all 
the  subscribers  with  a  device  which  few  appear  to  want,  yet  it  would  be  well  to 
provide  that  any  one  might  have  this  meter  if  he  desires  to  pay  $3  per  year 
for  it. 

There  appears  to  be  no  meter  on  the  market  to-day  for  2-party  and  4-party 
measured  lines.  Where  such  service  is  given,  as  in  Boston  and  Baltimore,  a  record 
is  kept  on  paper  slips  by  the  operators,  as  has  been  the  case  until  recently,  and 
still  is  to  some  extent  with  measured  business  lines  here. 

A  recording  device  that  will  show  to  the  subscriber  the  number  of  coins  or 
slugs  that  have  gone  into  the  coin  box  would  be  popular  with  the  subscriber  and 
would  also  be  a  check  for  the  telephone  company  upon  its  collectors.  But  there 
seems  to  be  no  such  device  at  present  in  use  by  any  telephone  company,  whether 
Bell  or  independent.  If  the  suggestion  for  measured  service  is  adopted  for  resi- 
dences there  would  be  less  need  for  such  registers,  since  many  of  those  who  are 
dissatisfied  with  this  and  other  features  of  the  coin  box  would  doubtless  change 
to  measured  service. 

Conclusions. 

In  the  light  of  all  the  above,  the  reduction  of  $700,000  in  the  charges  of  the 
Chicago  Telephone  Company  within  the  city  limits  appears  reasonable.  Such  a 
reduction  can  be  met  by  the  Company  in  several  ways. 

1.  Instead    of   putting   about    $975,000    into    the    depreciable    reserve,    as    in 
the  city  exchange  in   1911,  $500,000  may  be  set  aside  for  that  purpose  until  re- 
pairs and  the  cost  of  station  removals,  now  amounting  to    about     7.5%    of    the 
plant  investment,  shall  decline  further,  as  they  are  likely  to  do.    Even  the  $500,000 
left  in  the  reserve  on  this  supposition,  together  with  the  actual  repairs  and  remov- 
als of  1911,  would  bring  the  total  maintenance  and  depreciation  expense  only  to 
9%.     This  item,  like  the  Chicago  expense  for  station  removals,  is  higher  than  the 
average  for  the  Bell  companies,  either  as  a  whole  or  in  the  larger  cities. 

Tf  $475,000  of  the  proposed  reduction  of  $700,000  be  taken  from  the  depre- 
ciation reserve,  the  remaining  $225,000  may  be  secured  by  a  reduction  of  the  divi- 
dend on  the  company  as  a  whole  from  8%  to  7.1%,  or  on  the  city  portion  thereof 
to  6% c/r.  Since  the  American  Telephone  and  Telegraph  Company,  which  owns 
nearly  all  of  the  stock,  collects  in  rentals  within  the  city  about  $200,000  more 
than  the  service  appears  to  cost,  or  about  1%  on  the  stock,  a  reduction  in  the 
dividend  rate  to  6%>%  or  7%  seems  not  unreasonable. 

2.  For    maintenance    and    depreciation    9V->%    might    be    allowed.      On    this 
basis  the  reduction  in  last  year's  additions  to  the  reserve  would  be  about  $350,000. 
The  remaining  reduction  of  $350,000  could  be  secured  by  a  reduction  of  the  divi- 
dend on  the  city  part  of  the  stock  to  6^%.     Since  the  A.  T.  &  T.  would,  on  this 
hypothesis,   continue   to   receive   the   excess   rental,   that   would   virtually   mean   a 
three-fourths  per  cent,  further  dividend. 

3.  Another  solution,  in  lieu  of  part  of  the  reduction  of  dividends,  suggested 
above,  would  be  the  reduction  of  the  rental.     This  is  about  1%%  on  all  the  prop- 
erty and  about  21/4%  on  the  stock,  or  about  $1.75  per   'phone.     Of  the  $445,550.72 
paid  in   1911   and   of   the   $475,000   or  more   that   will   be   paid   in   1912,   $200,000 
could  apparently  be  deducted  by  the  local  company  and  still  leave  the  A.  T.  &  T. 
a  reasonable  return. 

4.  Still   another  treatment   of  the   matter  would  be   a   smaller   reduction   in 


58 

the  dividend  and  the  utilization  of  the  1%  profit  obtaining  by  loaning  to  the 
Central  Union  at  6%  the  proceeds  of  over  $10,000,000  of  the  $14,000,000  of  5% 
bonds  lately  sold  by  the  Chicago  Telephone  Company.  As  this  money  is  grad- 
ually withdrawn  from  the  Central  Union  to  meet  the  construction  needs  of  the 
Chicago  Company,  the  maintenance  of  a  1%  or  8%  dividend  rate  will  represent 
a  smaller  percentage  of  the  total  investment  than  now.  Taking  the  city  and 
suburban  divisions  together,  the  case  stands  thus: 

TABLE  NO.  21. 

DECLINING    EATE    OF    RETUEN. 

Per  Cent,  of 
Eeturn  on  Total 

Amount.  Eeturn.  Securities. 

1911.  1916.  1911.  1916.          1911.     1916. 

Dividends  at  8%. 

Stock $27,000,000     $27,000,000     $2,160,000     $2,160,000 

Interest  at  5%. 
Bonds  and  notes 6,000,000       20,000,000          300,000       1,000,000 


Total $33,000,000     $47,000,000     $2,460,000     3,160,000      7.45      6.72 

Without  any  reduction  in  the  rate  of  return  on  the  stock  and  bonds  the 
larger  proportion  of  bonds  now  assured  will  reduce  the  average  rate  of  return 
on  all  these  securities  from  7.45%  to  6.72%.  It  may  be  remarked  that  all  of  the 
new  5%  bond  issue  of  $14,000,000  has  netted  the  Company  about  par  or  a  trifle 
above. 

4.  Outside  of  the  expense  that  may  be  entailed  by  subway  construction  in 
1915-17,  or  the  last  three  years  of  the  coming  five-year  period,  there  seems  little 
in  the  claim  for  a  special  allowance  for  extraordinary  depreciation. 

It  is  assumed  that  little,  if  any,  expense  will  be  incurred  on  account  of  subway 
construction  in  1913,  and  that  the  expense  to  the  Chicago  -Telephone  Company 
will  not  exceed  $125,000  a  year  thereafter,  or  that  the  excess  should  be  capitalized. 
When  the  rates  are  again  adjusted,  five  years  hence,  this  matter  can  be  more 
intelligently  treated. 

It  is  believed  that  a  reduction  of  $700,000  in  telephone  rates  will  stimulate 
the  growth  of  the  company,  and  leave  enough  in  the  maintenance  and  in  the  de- 
preciation reserve  to  meet  the  needs  of  the  next  five  years,  and  omit  such  extraordi- 
nary needs  as  are  likely  to  develop  from  the  change  of  central  stations,  displace- 
ment of  switchboards  or  subway  construction.  It  will  also  leave  a  fair  return  to  the 
owners  of  the  property.  If,  however,  the  new  ordinance  should  provide,  as  it 
well  may,  for  a  measured  service  to  take  the  place  of  the  nickel  service  for  those 
who  desire  to  make  the  change,  the  cost  to  the  company  of  this  change,  divided 
over  the  five-year  period,  should  be  deducted  from  the  above  $700,000  a  year. 

Moreover,  the  ability  of  the  company  to  stand  this  reduction  in  revenue 
will  be  affected  by  how  it  is  done.  The  importance  of  a  wise  readjustment  of  the 
rates  among  over  twenty  classes  of  service  can  hardly  be  exaggerated. 

If  the  Company  were  not  confronted  with  the  expenses  and  loss  of  business 
that  to  some  small  extent  may  attend  the  competition  of  the  rival  company — the 
Illinois  Tunnel  Company — with  its  automatic  telephones,  a  lower  rate  of  return 
on  capital  might  be  demanded.  If  this  competition,  however,  should  become  at  all 
serious,  the  Chicago  Telephone  Company  might  be  expected  to  reduce  rates  vol- 
untarily as  much  as  is  here  advised. 

While  operating  expenses  per  telephone  are  increasing,  the  investment  per 
telephone  is  decreasing  and  the  business  is  rapidly  growing.  The  number  of  tele- 
phones in  the  city,  aside  from  the  25,000  or  more  of  the  rival  company,  grew  from 
268,383  on  December  31,  1911,  to  298,380  on  October  28,  1912,  an  increase  in  the 
ten  months  of  about  30,000,  as  compared  with  an  increase  of  only  29,300  in  the 
previous  twelve  months. 

This  situation,  joined  to  the  ability  of  the  Company  to  finance  its  extensions 
for  three  or  four  years  out  of  the  $14,000,000  of  5%  bonds  just  floated  may  permit 
the  Company  to  make  the  suggested  reduction  in  rates  without  any  cut  whatever  in 
its  8%  dividend  or  in  its  rental  to  the  A.  T.  &  T. 


59 

In  no  investigation  hitherto  conducted  by  the  writer  has  a  company  pursued 
as  open  a  policy  with  respect  to  its  books  and  methods  as  has  the  Chicago  Tele- 
phone Company,  and  in  turn  the  writer  has  endeavored  to  give  due  weight  to  all 
considerations  affecting  both  the  welfare  of  the  Company  and  the  just  demands  of 
the  public. 

EDWAED  W.  BEMIS. 


APPENDIX  1. 

CONDENSED  BALANCE  SHEETS,  1881  TO  1911,  INCLUSIVE.* 

Assets.  1881  1882  1883 

Invested  in  plant $490,928.99         $561,038.19         $621,606.72 

Invested  in  real  estate 2,537.00  2,537.00  2,000.00 

Other   investments    

Material    on    hand    8,657.38  5,068.42  6,309.60 

Furniture,  fixtures,  tools  and  teams 

Bonds   (sundry) 30,000.00  50,000.00 

Bills  and  accounts  receivable 99,432.13  21,614.52  37,224.16 

Balance  of  bills  and  accounts    

Payable  and  receivable   

Cash     50,089.92  39,006.16  34,332.09 

Total  assets   $651,645.42          $659,264.29          $751,472.57 

Liabilities.  1881  1882  1883 

Capital  stock $500,000.00          $500,000.00          $600,000.00 

Bonded  debt   

Eeserve  for  deferred  maintenance 

Reserve  for  taxes 

Reserve  for  insurance  fund 

Reserve   for   depreciation    on   buildings.  . 

Bills  and  accounts  payable 46,284.32  25,883.71  21,931.05 

Balance  of  bills  and  accounts  payable  and 

receiA~able    " 

Miscellaneous  reserves   34,000.00  50,000.00  58,500.00 

Surplus    71,361.10  83,380.58  71,041.52 

Total   liabilities    $651,645.42          $659,264.29          $751,472.57 

*Mr.  Hagenah's  Report,  pages  7-10,  for  1881-1900,  and  Hall's  Report,  Exhibit 
M.,  for  1901-11. 

Assets.  1884  1885                      1886 

Invested  in  plant $653,743.16  $732,388.05          $805,318.72 

Invested  in  real  estate  1,000.00  500.00 

Other  investments   

Material  on  hand 7,773.25  11,470.71             10,770.33 

Furniture,  fixtures,  tools  and  teams 

Bonds    (sundry)    50,000.00  50,000.00              50,000.00 

Bills  and  accounts  receivable    34,050.18  115,022.74           117,445.54 

Balance  of  bills  and  accounts  payable  and 
receivable    

Cash    45,236.55  54,899.32  62,903.30 


Total    assets    $791,803.14          $964,280.82      $1,046,437.89 


60 

APPENDIX  1— Continued. 
Liabilities.  1884  1885  1886 

Capital  stock $693,000.00          $762,300.00          $838,600.00 

Bonded  debt   

Reserve   for   deferred   maintenance 

Reserve  for  taxes 

Reserve  for  insurance  fund   

Reserve  for  depreciation  on  buildings.  . .  . 

Bills  and  accounts  payable   27,131.53  127,440.71  118,656.15 

Balance  of  bills  and  accounts  payable  and 

receivable    

Miscellaneous  reserves 65,500.00  74,500.00  82,500.00 

Surplus    6,171.61  40.11  6,681.74 

Total  liabilities    $791,803.14          $964,280.82      $1,046,437.89 

Assets.  1887  1888  1889 

Invested  in  plant $884,313.15      $1,131,342.03      $1,302,625.49 

Invested  in  real  estate 92,722.32 

Other   investments    

Material  on  hand 8,970.38  13,016.38  15,956.13 

Furniture,  fixtures,  tools  and  teams 

Bonds    (sundry)    25,000.00 

Bills  and  accounts  receivable 175,998.12  171,107.75  220,938.23 

Balance  of  bills  and  accounts  payable  and 

receivable    

Cash     49,064.31  20,719.26  35,200.56 


Total   assets    $1,236,068.28      $1,336,185.42      $1,574,720.41 

Liabilities.  1887  1888*  1889 

Capital  stock $964,400.00      $1,089,800.00      $1,253,300.00 

Bonded  debt   

Reserve  for  deferred  maintenance 

Reserve  for  taxes 

Reserve  for  insurance  fund   

Reserve  for  depreciation  on  buildings.  .  .  . 

Bills  and  accounts  payable   175,908.01  144,339.29  145,091.04 

Balance  of  bills  and  accounts  payable  and 

receivable    

Miscellaneous  reserves   92,500.00  94,000.00  109,000.00 

Surplus    3,260.27  8,046.13  67,329.37 


Total  liabilities   $1,236,068.28      $1,336,185.42      $1,574,720.41 

Assets:  1890  1891  1892 

Invested    in    plant    $1,734,212.73      $2,160,392.41      $3,082,262.20 

Invested  in  real  estate    150,127.25  332,761.17 

Other   investments    

Material  on  hand    34,098.51  52,606.81  74,760.30 

Furniture,  fixtures,  tools  and  teams 

Bonds   (sundry)    

Bills  and  accounts  receivable 596,698.49  99,784.02  142,191.17 

Balance  of  bills  and  accounts  payable  and 

receivable    

Cash     30,159.66  58,473.54  193,482.89 


Total  assets    $2,395,169.39      $2,521,384.03      $3,825,457.73 


61 


APPENDIX  1— Continued. 

Liabilities.                                                      1890  1891  1892 

Capital    stock     $1,754, 700.00  $2,000,000.00  $3,280,200.00 

Bonded  debt   

Reserve  for  deferred  maintenance 

Reserve  for  taxes    35,308.02  16,628.67 

Reserve  for  insurance  fund   

Reserve  for  depreciation  on  buildings.  .  .  . 

Bills  and  accounts  payable 397,056.85  242,493.13  260,228.66 

Balance  of  bills  and  accounts  payable  and 

receivable    

Miscellaneous  reserves   125,700.00  133,462.97  158,306.07 

Surplus    117,712.54  110,119.91  110,094.33 

Total  liabilities   $2,395,169.39  $2,521,384.03  $3,825,457.73 

Assets.                                                              1893  1894  1895 

Invested  in  plant   $3,668,190.38  $3,821,356.76  $4,169,686.09 

Invested  in  real  estate 332,849.17  338,632.62  351,753.20 

Material  on  hand 118,078.67  59,800.00  54,234.84 

Bills  and  accounts  receivable 156,772.67  151,399.39  165,309.74 

Cash     90,806.38  139,906.08  83,417.31 

Total  assets    " $4,366,697.27  $4,511,094.85  $4,824,401.18 

Liabilities.                                                      1893  1894  1895 

Capital    stock     $3,796,200.00  $3,796,200.00  $3,796,200.00 

Reserve  for  deferred  maintenance 120,000.00  200,889.40 

Reserve  for  taxes 57,358.06  43,702.36  77,065.26 

Bills  and   accounts  payable    197,122.39  220,375.64  329,656.24 

Miscellaneous  reserves   187,092.77  189,960.81  156,364.61 

Surplus    128,924.05  140,856.04  264,225.67 

Total  liabilities   $4,366,697.27  $4,511,094.85  $4,824,401.18 

Assets.                                                                 1896  1897  1898 

Invested  in  plant    $4,255,047.92  $4,192,868.40  $4,814,774.55 

Invested  in  real  estate   352,861.42  352,861.42  359,973.92 

Material  on  hand   78,199.00  70,407.99  102,726.45 

Bills  and   accounts  receivable    93,223.87  87,882.07  229,566.53 

Cash     315,647.18  453,454.69  181,902.02 

Total  assets    $5,094,979.39  $5,157,474.57  $5,688,943.47 

Liabilities.                                                         1896  1897  1898 

Capital    stock     $4,336,500.00  $4,336,500.00  $4,336,500.00 

Reserve   for   deferred   maintenance 200,889.40  10,0,000.00  474,782.22 

Reserve  for  taxes    81,428.31  90,747.85  60,536.97 

Bills  and  accounts  payable 143,311.56  188,165.58  257,549.72 

Miscellaneous  reserves   17,643.47  22,541.02  26,482.16 

Surplus    315,206.65  419,520.12  533,092.40 

Total    liabilities    $5,094,979.39  $5,157,474.57  $5,688,943.47 

Assets.  1899  1900 

Invested  in  plant   $5,993,364.55  $7,190,012.19 

Invested  in  real  estate   622,558.09  932,040.42 

Material    on    hand    178,401.94  221,338.67 

Bonds  (sundry)    15,000.00 

Bills  and  accounts  receivable 202,762.1 1 

Cash     .' 73,597.13  10,039.35 


Total    assets    $7,070,683.82          $8,368,430.63 


62 


APPENDIX  1— Continued. 


Liabilities. 


1899 


Capital    stock     $5,000,000.00 

Reserve  for  deferred  maintenance 903,934.14 

Eeserve  for  taxes 99,569.71 

Bills  and  accounts  payable 387,686.24 

Balance  of  bills  and  accounts  payable  and  receivable. 

Miscellaneous    reserves    29,391.35 

Surplus 650,102.38 

Total    liabilities    $7,070,683.82 

Assets.  1901  1902 

Investment  in  real  estate,  plant,  etc. — 

Real  estate   $  1,045,658.77  $  1,111,644.96 

Plant,  equipment,  etc 8,882,483.67  10,543,174.81 

Construction   in   process    5,338.03  679,034.43 


Total  investment  in  real  estate,  plant, 

etc 9,933,480.47  12,333,854.20 

Current  and  working  assets 

Supplies $  355,215.77  $      312,242.90 

Total  working  assets   355,215.77  312,242.90 

Cash  and  deposits  353,703.80  434,541.52 

Bills  receivable   3,410.06  3,396.93 

Accounts  receivable   329,141.12  549,431.16 

Prepaid  expenses  . 11,893.29  15,006.62 

Total   current   assets    698,148.27  1,002,376.23 


1900 

$7,000,000.00 

463,578.49 

73,222.74 

637,500.62 

17,897.14 

176,231.64 

$8,368,430.63 
1903 


?  1,273,735.59 
12,635,532.79 


13,909,268.38 

$      366,103.78 

366,103.78 

547,640.00 

1,569.31 

719,758.30 

26,223.40 

1,295,191.01 


Total  current  and  working  assets... 
Stocks  and  bonds   . 


1,053,364.04     $  1,314.619.13     $   1,661,294.79 


15,000.00 


14,500.00 
Total $11,001,844.51     $13,662,973.33 

Liabilities.  1901  1902 

Capital  liabilities — 

Capital    stock    $  9,315,900.00     $1 1,993,400.00 

Loans  by  banks    100,000.00 


125,036.75 
$15,695,599.92 

1903 
$14,000,000.00 


Total  capital  liabilities $  9,415,900.00     $11.993,400.00     $14,000,000.00 


Current  liabilities  —  • 
Accounts  payable   

$      837,436.01     $ 

371,381.91     3 

;      277,497.06 

Accrued  liabilities  not  due  

140,611.28 

183,419.61 

238,972.29 

Unearned  revenue  

5  484.71 

36  591  38 

46,336.56 

Total  current  liabilities  

$       983  532  00     $ 

591  392  90     if 

;       562  805  91 

Depreciation  and  other  reserves  — 
Depreciation  of  plant   

$      296  432  87     $ 

346  551  32     $ 

1       646  551  32 

Other    reserves    

5  875  74 

304  246  44 

21  475  49 

Total  depreciation  and  other  reserves. $      302,308.61     $      650,797.76     $      668,026.81 


Surplus     $      300,103.90     $      427,382.67,    $      464,767.20 


Total     $11,001,844.51     $13,662,973.33     $15,695,599.92 


63 

APPENDIX  1— Continued. 

Assets.  1904  1905  1906 

Investment  in  real  estate,  plant,  etc. — 

Eeal  estate  $  1,346,560.20  $  1,509,895.25  $  1,764,281.40 

Plant,  equipment,  etc 13,208,689.17  14,317,138.17  16,706,425.90 

Construction  in  process 88.87  *336.28 

Total  investment  in  real  estate,  plant, 

etc $14,555,249.37     $15,827,122.29     $18,470,371.02 

Current  and  working  assets — 


Tools  and  vehicles  

27,799.50 

83,885.85 

169,056.85 

Supplies  

173,156.42 

125,424.67 

411,445.63 

Total   working   assets    

$      211,093.21 

$      229,056.08     $ 

625,461.18 

Cash  and  deposits  

511,312.69 

251,321.36 

19,084.94 

Bills  receivable   

501,709.09 

852,581.59 

12,547.21 

Accounts    receivable    

762,384.77 

489,946.91 

674,646.28 

Prepaid  expenses    

13,124.91 

3,667.33 

1,833.33 

Total  current  assets  

$  1,788,530.86 

$  1,597,517.19     $ 

708,111.76 

Total  current  and  working  assets $  1,999,624.07     $  1,826,573.27     $  1,333,572.94 


Stocks  and  bonds   $      114,650.07     $      104,263.39     $        93,876.74 


Total    f $16,669,523.51     $17,757,958.95     $19,897,820.70 


Liabilities                                                       1904  1905                      1906 

Capital  liabilities — 

Capital  stock   $14,000,000.00  $14,000,000.00     $14,000,00.00 

Loans   by   banks    250,000.00 


Total  capital  liabilities $14,000,000.00     $14,000,000.00     $14,250,000.00 


Current  liabilities — 

Bills   payable    (Western    Electric 

Company)    $      500,000.00 

Accounts  payable   $  187,361.85     $      272,577.11         1,188,901.94 

Accrued  liabilities  not  due 311,120.30            275,641.34            370,708.04 

Unearned  revenue 39,891.13              38,122.08              34,242.31 


Total    current    liabilities    $      538,373.28     $      586,340.53     $2,093,852.29 


Depreciation  and  other  reserves — 

Depreciation    of    plant $  913,825.83     $  1,295,155.61  $  1,692,066.24 

Insurance  fund    150,000.00  175,000.00 

Other  reserves   588,941.12             871,268.52  613,563.50 


Total  depreciation  and  other  reserves. $  1,502,766.95     $  2,316,424.13     $  2,480,629.74 


Surplus    $      628,383.28     $      855,194.29     $  1,073,338.67 


Total    $16,669,523.51     $17,757,958.95     $19,897,820.70 

*Decrease. 


APPENDIX  1— Continued. 
Assets.  1907  1908  1909 

Investment  in  real' estate,  plant,  etc. — 

Eeal  estate   $  2,320,934.5?,  $  2,551,487.92  $  2,749,985.66 

Plant,  equipment,  etc    24,151,045.70  25,206,641.39  26,787,282.71 

Construction   in  process    173,066.33  909,225.82  1,053,058.65 

Total  investment  in  real  estate,  plant, 

etc $26,644,146.56     $28,667,355.13     $30,590,327.02 


Current  and  working  assets — 

Office  furniture  and  fixtures $  104,776.34     $      145,692.99     $      167,158.95 

Tools  and  vehicles    263,296.53  288,570.48  261,530.67 

Supplies 399,997.23  458,221.16  521,111.2.-) 

Total   working   assets    768,070.10  892,484.63  949,800.87 

Cash  and-  deposits 157,837.03  455,364.17  3,758,692.10 

Bills  receivable   12,356.20  12,429.61  828.79 

Accounts    receivable    864,668.69  771,079.24  727,823.80 

Prepaid   expenses 30,745.79  5,951.23  57,110.22 

Total  current  assets   1,065,607.71  1,244,824.25  4,544,454.91 


Total  current  and  working  assets $  1,833,677.81     $  2,137,308.88     $  5,494,255.78 

Stocks  and  bonds $         92,819.93     $        82,933.27     $        72.588.00 


Total $28,570-,644.30     $30,887,597.28     $36,157,170.80 


Liabilities.  1907  1908  1900 

Capital  liabilities — 

Capital    stock     $17,564,811.78     $27,000,000.00     $27,000,000.00 

First  mortgage  5%  bonds 5,000,000.00 

Loans  by  banks    1,385,000.00 


Total   capital  liabilities    $18,949,811.78     $27,000,000.00     $32,000,000.00 


Current  liabilities- 
Bills  payable    (Western   Electric 

Company)    $      300,000.00 

Accounts  payable    1,371,687.26     $      397,580.48     $      430,066  31 

Accrued  liabilities  not  due 290,093.33  295,679.92  618,226.99 


Total  current  liabilities    $  1,961,780.59     $      693,260.40     $   1,048,293.30 


Depreciation   and   other   reserves — 

Depreciation  of  plant    $  1,899,613.46  $  1,901,739.25  $   1,901,739.25 

Insurance  fund    200,000.00  211,809.10  278,298.22 

Other    reserves 449,495.78  396,110.50  183,454.44 


Total  depreciation  and  other  reserves. $  2,549,109.24     $  2,509,65885     $  2,363,491.91 


Surplus     $   5,109,942.69      $       684,678.03      $       745;385.59 


Total     $28,570,644.30     $30,887,597.28     $36,157,170.80 


65 

APPENDIX  1— Continued. 

Assets.  1910  1911 

Investment  in  real  estate,  plant,  etc. — 

Eeal  estate : $  2,868,606.51  $  3,204,445.31 

Plant,  equipment,  etc 29,229,242.13  33,850,656.82 

Construction  in  process 1,261,689.21  1,258,076.27 


Total  investment  in  real  estate,  plant,  etc $:!3,359,537.85     $37,713,178.40 


Current  and  working  assets — 

Office  furniture  and  fixtures  $  126,869.53     $      178,635.70 

Tools    and    vehicles    284,467.69  304,100.40 

Supplies    703,414.63  831,629.65 

Total    working   assets    1,114,751.85  1,314,365.75 

Cash  and  deposits   1,820,503.51  874,947.62 

Bills  receivable    , 289,757.84  636.14 

Accounts  receivable    592,857.04  686,973.76 

Prepaid    expenses    68,379.31  127,509.90 

Total  current  assets    2,771,497.70  1,690,067.42 


Total  current  and  working  assets  $  3,886,249.55     $  3,004,433.17 


Stocks  and  bonds $      642,966.24     $          10,393.90 


Total   $37,888,753.64  $40,728,005.47 

Liabilities                                                                                    1910  1911 

Capital  liabilities — 

Capital   stock    $27,000,000.00  $27,000,000.00 

First  mortgage  5%  bonds   5,000,000.00  5,000,000.00 

Loans   by   banks    1,000,000.00 


Total  capital  liabilities   $:;2,000,000.00     $33,000,000.00 


Current  liabilities — • 

Accounts  payable $  950,872.61     $  1,214,855.25 

Accrued  liabilities  not  due 585,795.18            671,430.09 

Unearned  revenue   1,950.91 


Total   current   liabilities    $  1,538,618.70     $  1,886,285.34 


Depreciation   and  other  reserves — 

Depreciation   of  plant    $  3,695,160.95  $  4,971,823.19 

Insurance   fund    291,400.65  307,548.21 

Other  reserves    268,500.41  364,735.49 


Total  depreciation  and  other  reserves $  4,255,062.01     $  5,644,106.89 


Surplus    $        95,072.93     $      197,613.24 


Total $37,888,753.64     $40,728,005.47 


66 


APPENDIX  2. 

CHICAGO  &  SUBURBAN  APPRAISAL 
VALUES  AS  OF  AUGUST  1,  1911. 

APPRAISAL  BY  THE  BYLLESBY  AND  ARNOLD  COMPANIES. 

August  28,  1912. 

Repro-  Present          Present 

Book  duetion  Value  Value 

Account  Value  Value  (a)  (b) 

(10  Buildings    $2,570,280.15  $2,962,903.27  $2,526,717.00  $2,714,719.91 

103       (20  Land     601,801.14     1,331,642.60     1,331,642.60     1,331,642.60 

(17  Central  Office  Oper- 
ating Equipment  5,192,417.01     5,588,700.62     3,853,700.50     4,318,912.77 
105-07(27  Exchange  Furniture 

and  Fixtures 87,897.14  97,963.47  78,062.90  78,062.90 

(37  School  Equipment..         13,203.18  21,306.93  13,238.56  13,238.56 


Total  105-07 $5,293,517.33  $5,707,971.02  $3,945,001.96  $4,410,214.23 

(18  Station    Apparatus.  $2,644,586.81  $1,890,208.52  $1,959,554.62 

(28  Installation     2,784,445.03  2,640,594.82     2,371,106.82 

(38  Drop    Wires 927,433.64  683,605.23         727,518.33 

105-08(48  Interior  Block 

Wires     19,388.51  14,139.52           15,212.50 

(58  Private  Branch  Ex- 
change      1,240,991.34  970,689.48     1,040,037.55 

(68  Booths  and  Special 

cial  Fittings 73,378.76  48,819.18           55,034.06 


Total  105-08 $7,252,801.53  $7,690,224.09  $6,248,056.75  $6,168,463.88 

(01         Exchange  Pole 

Lines    $2,988,561.50  $3,963,423.00  *$2,270,076.00  *$2,541,981.00 

(02         Exchange  Aerial 

Cable   1,571,150.43     1,840,029.00      1,325,487.00      1,587,544.00 

(03         Exchange  Aerial 

Wire    2,280,366.76     1,186,770.00          948,861.00         980,181.00 

(04(14  Underground 

Conduit  Main. 

(  Total 3,984,762.14     5,866,070.00      4,516,703.00      5,406,696.00 

(     (24  Underground 
107      (               Conduit  Subsid- 
iary     

(05(15  Underground 

Cable    Main . 

(  Total    5,554,569.62     6,944,364.00      5,565,063.00      6,406,707.00 

(      (25  Underground 

Cable  Subsid- 
iary   

(      (35  House  Cables.  .         53,874.00        215,036.00          157,726.00          185,738.00 
(06         Exchange   Sub- 
marine Cable  993.43 
(09         Exchange 

Right  of  Way        30,329.50         118,987.00          106,084.00          118,327.00 


Total    107.. $16,464,608.37  20,134,679.00    14,890,000.00    17,227,174.00 


67 

Eepro-  Present  Present 

Book                 duction  Value  Value 

Account                               Value                Value  (a)  (b) 

(01  Toll  Pole  Lines.. $    548,701.70  $    787,369.00  *$    465,939.00  *$    509,186.00 

(02  Toll  Aerial  Cable        34,504.44          57,371.00  44,088.00  50,528.00 

(03  Toll   Aerial   Wire      578,798.33     1,041,391.00  828,677.00  884,602.00 

109  (04  Toll  Underground 

Conduit     393,748.16        399,486.00  321,210.00  371,110.00 

(05  Toll  Underground 

Cable    410,221.46        585,513.00  480,443.00  542,316.00 

(06  Toll  Submarine 

Cable    

(09  Toll  Eight  of 

Way 27.44 

Total  109 $1,966,001.53  $2,871,130.00  $2,140,357.00  $2,357,742.00 

110  Construction  in 

Process    $1,513,525.00  $1,589,201.00  $1,589,201.00  $1,589,201.00 

111  Office  Furniture  & 

Fixtures    157,600.76        266,107,79  214,027.06  214,027.06 

(01  Tools 105,814.82         154,660.14  92,796.15  92,796.15 

112  (02  Teams     132,142.63         159,349.45  118,943.50  118,943.50 

(03  Motor   Vehicles..         42,551.47           58,638.82  44,077.05  44,077.05 

Total   $     280,508.92$    372,648.41  $    255,816.70  $    255,816.70 

113  Total  Supplies...       751,477.42        921,596.00  882,871.15  882,871.15 

TOTAL $36,485,841.0643,848,103.18  34,023,691.22  37,151,872.53 

120              Working  Capital        847,877.85     1,050,000.00  1,050,000.00  1,050,000.00 


GEAND  TOTAL. $37,333,719.00  44,898,103.18     35,073,691.00     38,201,873.00 

NOTE:  *Present  value  sub-divisions  of  the  107  and  109  accounts  are  based 
on  appraisal  figures  but  we  have  pro-rated  the  overhead  costs  against  the  various 
classes  of  plant. 


68 


APPENDIX  3. 

CHICAGO  EXCHANGE  APPRAISAL 

VALUES  AS  OF  AUGUST  1,  1911 
APPRAISAL  BY  THE  BYLLESBY  AND  ARNOLD  COMPANY 


August  28,  1912 


Account 


Book 
Value 


Repro- 
duction 
Value 


Present 

Value 

(a) 


Present 

Value 

(b) 


103- 


(10    Buildings $2.328,433.31   $2,642,405.59  $2,253,975.80  $2,418,266.91 

(20    Land 326,956.61     1,173,936.98     1,173,936.98     1,173,936.98 


(17 

105-07(27 
(37 


(18 
(28 
(38 

105-08(48 
(58 
(68 


Central    Office    Operating    Equip- 
ment   4,564,693.90  4,857,496.48  3,357,489.16 

Exchange  Furniture  and  Fixtures  .       73,997.58  81,869.41  64,769.68 

School  Equipment 13,203.18  21,306.93  13,238.56 


3,758,548.30 
64,769.68 
13,238.56 


Total  105-07 $4,651,894.66     4,960,672.82     3,435,497.40     3,836,556.54 


Station  Apparatus 

Installation 

Drop  Wires 

Interior  Block  Wires 

Private  Branch  Exchanges  . 
Booths  and  Special  Fittings 


2,180,563.31 

2,296,822.34 

673,885.74 

17,385.95 
1,180,171.05 

60,322.27 


1,593,092.64 

2,178,225.90 

495,203.94 

12,756.98 

923,423.28 

40,214.85 


1,647,973.41 

1,962,953.13 

527,704.48 

13,602.43 

988,258.92 

45,241.70 


Total  105-08 $6,115,389.57     6,409,150.66     5,242,917.59     5,185,734.07 


(01         Exchange  Poles 

(02         Exchange  Aerial  Cable 

(03         Exchange  Aerial  Wire 

(    (14  Underground  Conduit,  Main  ) 

(04(  Total  : ) 

107      (    (24  Underground  Conduit,  Sub-) 

(    (  sidiary                               ) 

(    (15  Underground  Cable  Main    ) 

(    (  Total                                ) 

(05(25  Underground  Cable  Subsidi-) 

(    (  ary                                     ) 

(    (35    House  Cables 

(06  Exchange  Submarine  Cable  . . . 

(09         Exchange  Right  of  Way 


$1,146,320.74  1,600,289.00  *  983,638.00  *1,108,722.00 

1,116,775.78  1,263,470.00  889,936.00  1,081,989.00 

1,673,757.58  374,359.00  303,544.00  316,239.00 

3,532,936.35  5,062,428.00  3,875,283.00  4,672,668.00 


4,848,264.39     6,168,669.00     4,927,359.00     5,687,207.00 


52,685.31 

993.43 

17,626.77 


211,744.00        155,018.00        182,799.00 
65,424.00         58,219.00         65,099.00 


Total  107 $12,389,360.35   14,746,383.00  11,192,997.00   13,114,723.00 


69 

APPENDIX  3— Continued 
CHICAGO  EXCHANGE  (Cont'd) 


Account 

Book 
Value 

Repro- 
duction 
Value 

Present 
Value 
(a) 

Present 
Value 
(b) 

109 

110 
111 

112 

113 
120 

(01 
(02 
(03 
(04 
(05 

(01 
(02 
(03 

Toll  Pole  lines  . 

$    1,663.07 

$  97,381.00 
17,254.00 
159,409.00 
253,503.00 
406,822.00 

*$  60,031.00 
12,239.00 
129,369.00 
197,376.00 
328,952.00 

*$  67,564.00 
14,727.00 
132,987.00 
233,973.00 
375,202.00 

Toll  Aerial  Cable.  .  . 

22,651.28 

Toll  Aerial  Wire. 

32,122.84 

Toll  Underground  Conduit  . 
Toll  Underground  Cable 

.  .  .      321,124.44 
.  .  .      383,989.60 

Total  109  

.  .  .    $761,551.23 

934,369.00 
$1,392,861.00 
245,150.59 

104,810.19 
125,773.61 
42,842.41 

727,967.00 
$1,392.861.00 
196,983.03 

62,886.12 
92,957.87 
30,631.79 

824,453.00 
$1,392,861.00 
196,983.03 

62,886.12 
92,957.87 
30,631.79 

Construction  Process  

...$1,326,534.32 

Office  Furniture  and  Fixtures  .  . 

.  .  .      126,479.17 

Tools  

.   .       72,492.69 

Teams  

.      105,066.16 

Motor  Vehicles 

28,896.35 

Total  112  

...$   206,455.20 

273,426.21 
660,287.65 

33,438,643.50 
887,250.00 

186,475.78 
621,562.80 

26,425,174.38 
887,250.00 

186,475.78 
621,562.80 

28,951,553.21 
887,250.00 

Total  Supplies  

...$   513,721.00 

Grand  Total  

...$   580,494.73 

Working  Capital.           

.  .  .     683,224.58 

$29,263,719.00 

34,325,894.00 

27,310,425.00 

29,838,803.00 

NOTE:    *Present  value  subdivisions  of  the  107  and  109  accounts  are  based  on  appraisal  figures 
but  we  have  pro-rated  the  overhead  costs  against  the  various  classes  of  plant. 


70 


APPENDIX  4. 

COST  OF  THE  PEOPERTY  NEW. 
Chicago  and  Suburban. 

The  following  table  is  the  cost  as  of  December  31st,  as  shown  by  the  books, 
for  each  year  since  1890: 

Depreciable 
Year.  Property.* 

1891    $  2,144,570.28 

1892  3,015,987.28 

1893  3,629,678.99 

1894  3,830,964.42 

1895  4,189,900.08 

1896  4,537,146.16 

1897  4,870,554.46 

1898  5,484,892.92 

1899  6,857,940.65 

1900  8,446,058.27 

1901  10,675,635.65 

1902  13,287,222.57 

1903  15,337,752.64 

1904  16,480,349.91 

1905  18,128,924.28 

1906  21,442,125.73 

1907  25,656,956.43 

1908  26,929,904.49 

1909  28,578,619.03 

1910  31,130,347.86 

1911  35,425,456.16 

*Hall,  Schedule  2. 
fHall,  Schedule  3. 

JHere  it  is  not  actual  cost  as  shown  by  the  books,  but  what  Mr. 
reasonable  as  per  Schedule  3. 


All  Physical 
Property.f 

Working 
Capital.t 

Total 

$  2,184,990.28 

$    100,000 

$  2,284,990.28 

3,239,041.20 

150,000 

3,389,041.20 

3,852,820.91 

175,000 

4,027,820.91 

4,058,606.34 

175,000 

4,233,606.34 

4,417,542.00 

200,000 

4,617,542.00 

4,764,788.08 

225,000 

4,989,788.08 

5,098,196.38 

250,000 

5,348,196.38 

5,719,647.34 

300,000 

6,019,647.34 

7,153,580.07 

350,000 

7,503,580.07 

8,790,688.27 

400,000 

9,190,688.27 

11,051,328.15 

500,000 

11,551,328.15 

13,667,353.42 

650,000 

14,317.353.42 

15,723,177.09 

700,000 

16,423,177.09 

16,907,094.87 

750,000 

17,657,094.87 

18,644,573.54 

850,000 

19,494,573.54 

22,097,577.82 

1,000,000 

23,097,577.82 

26,654,433.57 

1,200,000 

27,854,433.57 

28,737,322.99 

1,300,000 

30,037,322.99 

30,634,737.09 

1,400,000 

32,034,737.09 

33,371,331.79 

1,550,000 

34,921,331.79 

37,717,844.09 

1,750,000 

39,467,844.09 

Hall  considers 


71 


APPENDIX  5. 

GROWTH  OF  CHICAGO  TELEPHONE  COMPANY'S  PLANT/ 


w  I  m 
X  4> 

4)  C 

«   -2 

&£   °a 
•2  §   3£ 

^                B  SS     C  C 

4)  3         <0 
TJ'O       "O+j         "O 

C5        C2        <uS 
30        p  3        *  3 
ej        *o       -  f» 

v,      «-.  ,     r  £ 

O*o        0  13        ^  bO 

£3    £§    S® 
52    =2    ~c 

g  be     2  Sao     S  3 

£ 

•-~  "C 

iS 

& 
|f 

£ 

1881  4   

H 

- 

1882  4   

11 

1883  10    3,479 

f 

3,517 

1884  10    3,927 

4,250 

4,250 

1885  ....      10    4  455 

...     760 

4,000 

4,760 

1886    .  .     10    4,867 

1,462 

4,300 

5,762 

1887          10    5,382 

2,000 

4,392 

6,392 

1888  10    5,427 

3,127 

5,932 

9,073 

1889  ...      10    6,394 

3,272 

6,691 

9,963 

1890  10    7,456 

6,456 

8,199 

15,593 

1891  13    9,024 

7,319 

10,191 

17,505 

1892     .  .   12   10,431 

14,093 

15,188 

29,281 

1893     ...   12   10376 

18,654 

15,614 

34,268 

1894  15   12,049 

49     160   18,820 

5,802 

11,900 

36,522 

1895  22   13,869 

52     171   19,050 

6,991 

12,127 

38,168 

1896  31   15,384 

54     185   20,548 

7,189 

12,713 

40,450 

1897  42   16,909 

58     234   24,324 

7,864 

13,932 

46,120 

1898  58   21,188 

61     267   30,259 

11,225 

15,629 

57,113 

1899  70   27,663 

104     527   41,757 

14,445 

18,692 

74,894 

1900  84   36,414 

121     874   68,593 

19,194 

22,818 

110,605 

1901  95   53,511 

156    1,019   87,685 

25,976 

32,124 

145,785 

1902  112<   79,043 

197    1,192  123,708 

32,570 

38,742 

195,020 

1903  114  101,187 

235    1,372  149,234 

40,480 

41,484 

231,193 

1904  $111  117,893 

254    1,468  161,202 

46,697 

45,189 

253,088 

1905    156  143,223 

335    1,755  187,231 

51,711 

52,213 

291,155 

1906   162  170,834 

389    1,964  248,939 

53,031 

57,016 

358,986 

1907  163  202,681 

431    2,309  352,098 

56,492 

62,578 

471,168 

1908  163  231,180 

598    2,579  423,082 

64,013 

63,350 

550,445 

1909  262,359 

614    2,685  493,787 

69,666 

62,985 

626,438 

1910  138  300,618 

647    2,775  536,137 

71,984 

60,612 

668,733 

1911  140  335,652 

703    3,110  653,989 

90,575 

63,006 

807,571 

*From  Mr.  Hagenah's  report,  save  for  1910-11. 

fThe  exchanges  in  Chicago  exchange  system  are  counted  as  one. 

^Decrease  from  combination. 

flNo  record. 


72 


APPENDIX  6. 

PLANT  AND  COST  STATISTICS.* 

City  and  Suburban. 

As  per  Hall. 

TABLE  NO.  A. 

INVESTMENT  IN  UNDERGROUND  CONDUIT  AND 
TOTAL  DUCT  MILES  OF  CONDUIT. 


Investment  in 
Underground 
Conduit. 


Investment 

per 
Duct.  Foot. 


Duct  Miles 

Years.                                                               Conduit.  of  Conduit. 

1891    $    346,866  109  60c 

1892 545,584  154  67c 

1893 599,009  160  71c 

1894    607,536  160  72c 

1895    620,593  171  69c 

1896    639,847  185  65c 

1897    711,709  234  58c 

1898    755,987  267  54c 

1899 984,525  527  35c 

1900    1,149,222  874  25c 

1901    1,329,107  1,019  25c 

1902 1,567,620  1,192  25c 

1903    1,762,600  1,372  24c 

1904    1,865,402  1,468  24c 

1905    2,140,409  1,755  23c 

1906    2,352,168  1,964  23c 

1907    ! 3,337,393f  2,100  estimate        30c 

1908 3,456,704  2,252  estimate        29c 

1909    3,610,802  2,403  28c 

1910    3,844,636  2,493  29c 

1911  .  . .  , 4,083,836  2,794  28c 

*These  figures  are  illustrated  by  charts  in  Hall's  Report  and  are  taken  from 
the  record  of  the  company.  Aerial  wire  and  poles  are  omitted  because  the  ap- 
praisal showed  the  books  on  these  matters  were  incorrect. 

fin  1907  ducts  above  ground  connecting  cable  with  tunnel  were  charged  to 
underground  construction. 


73 


APPENDIX  6— Continued. 

TABLE  NO.  B. 

INVESTMENT  IN  UNDERGOUND  CABLE  AND 
TOTAL  MILES  OF  UNDERGROUND  WIRE. 


Investment 

Miles  of 

Investment 

Underground 

Underground 

per  Mile 

Years. 

Cable. 

Wire. 

of  Wire. 

1891     

$    273,137 

8,291 

$32.94 

1892   

447,379 

14,183 

31.54! 

1893   

598,774 

17,143 

34.93 

1894     

600,373 

18,820 

31.9,0 

1895     

624,696 

19,050 

32,79!  . 

1896     

654,826 

20,548 

31.87 

1897     

702,931 

24,324 

28.90 

1898     

795,654 

30,259 

26.29   . 

1899     

944,823 

41,757 

22.63 

1900     

1,323,526 

68,593 

19.30. 

1901     

1,721,724 

87,685 

19.64. 

1902     

2,113,272 

123,708 

17.08 

1903     

2,313,802 

149,234 

15.50 

1904     

2,409,112 

161,202 

14.94 

1905     

2,649,825 

187,231 

14.15 

1906     

3,555,264 

248,939 

14.28 

1907     

4,127,627 

343,069 

12.03 

1908     

4,331,566 

298,177 

10.88 

1909     

4,889,326 

466,796 

10.47 

1910     

5,290,114 

509,143 

10.39 

1911     

6,240,478 

626,935 

9.95 

TABLE  NO.   C 

INVESTMENT  IN  UNDERGOUND  CONDUIT  AND   CABLE  AND 
TOTAL  MILES  OF  WIRE. 


Years. 


Investment  in 
Underground 
Conduit  and 
Cable. 


1891   $    620,004 

1 892   992,963 

1893 1,197,783 

1894 1,207,910 

1895    1,245,289 

1896 1,294,674 

1897  . 1,414,640 

1898    1,551,642 

1 899     1,929,348 

1900    2,472,749 

1901    3,050,831 

1902   3,680,893 

1903   4,076,403 

1904 4,274,515 

1905 4,790,234 

1906   5,907,433 

1907    7,465,021 

1908    7,788,271 

1909 8,500,130 

1910 9,134,751 

1911    10,324,315 


Investment 

Miles  of  Per  Mile 

Underground  Underground 

Wire.  Wire. 


8,291 

14,183 

17,143 

18,820 

19,050 

20,548 

24,324 

30,259 

41,757 

68,593 

87,685 

123,708 

149,234 

161,202 

187,231 

248,939 

343,069 

398,177 

466,796 

509,143 

626,935 


$74.78 
70.01 
69.88 
64.18 
65.37 
63.01 
58.16 
51.28 
46.20 
36.05 
34.79 
29.75 
27.32 
26.52 
25.58 
23.73 
21.76 
19.56 
18.21 
17.94 
16.47 


APPENDIX  6— Continued. 


Years. 

1891  . . 

1892  .. 

1893  .. 

1894  . , 

1895  . 


TABLE  NO.  D. 

INVESTMENT  IN  CENTEAL  OFFICE  AND 
SUBSCKIBERS'  STATION  EQUIPMENT. 

Investment  in 
Equipment. 


$      418,762 

579,657 

720,431 

796,107 

905,497 

1896 1,020,870 

1897 1,086,093 

1898   1,257,165 

1899   1,627,179 

1900 1,952,983 

1901 2,757,502 

1902 3,744,330 

1903 4,674,471 

1904 5,066,024 

1905 5,626,443 

1906   6,614,655 

1907 8,226,293 

1908 8,848,913 

1909   '. 9,621,100 

1910 11,151,334 

1911   13,193,538 


Number  of 

Investment 

Stations^ 

per  Station. 

9,043 

$46.31 

10,431 

55.57 

11,408 

63.15 

12,222 

65.14 

13,542 

66.87 

15,024 

67.95 

16,462 

65.98 

20,512 

61.29 

26,825 

60.66 

35,347 

55.25 

53,511 

51.53 

79,043 

47.37 

101,187 

46.20 

117,893 

42.97 

143,223 

39.28 

170,834 

38.72 

202,681 

50.59 

231,180 

38.28 

262,359 

36.67 

300,618 

37.09 

335,652 

39.31 

TABLE  NO.  E. 

TOTAL  INVESTMENT  IN  EQUIPMENT  AND  CONSTRUCTION  AND 
TOTAL  NUMBER  OF  STATIONS. 


Years. 


Total 

Investment  in 
Equipment  and 
Construction. 


1891   $  1,898,123 

1892 2,751,220 

1893   3,357,532 

1894   3,514,478 

1895 3,822,279 

1896 4,128,672 

1897 4,429,409 

1898   4,987,350 

1899 6,058,601 

1900 7,300,608 

1901 9,331,901 

1902 11,832,393 

1903   13,670,011 

1904   14,672,769 

1905   16,081,671 

1906 18,810,055 

1907 21,750,059 

1908 22,805,655 

1909   ? 24,526,207 

1910   26,904,189 

1911 30,629,452 


Number 
of  Stations. 

9,043 

10,431 

11,408 

12,222 

13,542 

15,024 

16,462 

20,512 

26,825 

35,347 

53,511 

79,043 
101,187 
117,893 
143,223 
170,834 
202,681 
231,180 
262,359 
300,618 
335,652 


Total 

Investment 
per  Station. 

$209.89 
263.75 
294.31 
287.55 
282.25 
274.81 
269.07 
243.14 
225.86 
206.54 
174.39 
149.69 
135.10 
124.46 
112.28 
110.11 
107.31 
98.65 
93.48 
89.50 
91.25 


75 


APPENDIX  6— Continued. 


TABLE  F. 
MAINTENANCE  AS  A  PERCENTAGE  OF  AVERAGE  INVESTMENT. 

Years. 


Maintenance, 
Per  Cent. 


1891 
1892 
1893 
1894 
1895 
1896 
1897 
1898 
1899 
1900 
1901 
1902 
1903 
1904 
1905 
1906 
1907 
1908 
1909 
1910 
1911 


10.53 
9.88 
8.33 
9.44 

10.86 
9.49 
7.55 
8.74 
8.35 

11.55 
8.54 
8.56 
8.89 
6.93 
9.01 
7.26 
9.81 
8.64 
8.42 
7.78 
6.95 


TABLE  NO.  G. 


EXTENSION  OF  CONDUIT  AND  UNDERGROUND   WIRE. 

Duct  Miles  of  U.  W. 

Miles  of         Per  Duct  Miles 
of  Conduit.  of  Conduit. 


Years. 
1884 
1885 
1886 
1887 
1888 
1889 
1890 
1891 
1892 
1893 
1894 
1895 
1896 
1897 
1898 
1899 
1900 
1901 
1902 
1903 
1904 
1905 
1906 
1907 
1908 
1909 
1910 
1911 


Miles  of  under- 
ground wire. 

760 

1,462 
2,000 
3,141 


6,456 

8,291 

14,183 

17,143 

18,820 

19,050 

20,548 

24,324 

30,259 

41,757 

68,593 

87,685 

123,708 

149,234 

161,202 

187,231 

248,939 

343,069 

398,177 

466,796 

509,143 

626,935 


109 

154 

160 

160 

171 

185 

234 

267 

527 

874 

1,019 

1,192 

1,372 

1,468 

1,755 

1,964 

2,100 

2,252 

2,403 

2,493 

2,794 


76.06 
92.09 
107.14 
117.62 
111.40 
111.07 
103.95 
113.33 
79.23 
78.48 
86.05 
103.78 
108.77 
109.81 
106.68 
126.76 
163.32 
176.81 
194.25 
204.22 
224.39 


76 

APPENDIX    6— Continued. 


TABLE 

NO.  H. 

3S  OF 

EXCHANGE  WIRE 

AND  NUMBER 

OF  STATIONS, 

EXCLUDING  EXTENSION  STATIONS. 

Years. 

Total  Milesr 
of  Wire 

Total  No. 
of  Stations. 

Miles  of  Wire 
Per-station. 

1884 

4,250 

3,927 

1.08 

1885 

4,760 

4,455 

1.07 

1886 

5,762 

4,867 

1.18 

1887 

6,392 

5,382 

1.19 

1888 

9,073 

5,427 

1.67 

1889 

9,963 

6,394 

1.56 

1890 

13,426 

7,772 

1.73 

1891 

18,206 

9,043 

2.01 

1892 

25,883 

10,431 

2.48 

1893 

31,920 

11,408 

2.80 

1894 

33,934 

12,222 

2.78 

1895 

35,148 

13,542 

2.59 

1896 

36,731 

15,024 

2.44 

1897 

41,760 

16,462 

2.54 

1898 

51,566 

20,274 

2.54 

1899 

67,607 

26,075 

2.55 

1900 

101,430 

34,351 

2.95 

1901 

135,234 

50,984 

2.65 

1902 

183,270 

75,755 

2.42 

1903 

218,101 

96,823 

2.25 

1904 

238,277 

112,560 

2.12 

1905 

274,944 

136,500 

2.01 

1906 

341,108 

162,795 

2.10 

1907 

444,010 

190,061 

2.34 

1908 

508,329 

213,964 

2.37 

1909 

582,818 

241,570 

2.41 

1910 

625,237 

276,908 

2.26 

1911 

763,39.0 

309,349 

2.47 

77 


APPENDIX  7. 

BASE  FIGURES  OF  APPRAISAL  VS.  BOOK  VALUE. 
COMPARISON  OF  APPRAISAL  BASE  FIGURES  AND  BOOK  VALUE 

(Chicago  and  Suburban) 
As  at  August  1,  1911. 

Appraisal        Increase 

Book  Value  Base  Figures      Decrease 
Real  Estate: 

Land     $      601,801.14  $1,083,958.15  $    482,157.01 

Buildings , 2,568,777.87  2,260,033.01          308,744.86* 

Total   Real   Estate $3,170,579.01  $3,343,991.16  $    173,412.15 

Central  Office  Equipment: 

Operating  Equipment    $  4,386,011.81 

Furniture  and  Fixtures 84,816.87 

School   Equipment    16,837.07 

Total    Central   Office   Equipment. $  4,986,077.83  $  4,487,665.75  $    498,412.08* 

Subscribers  Station  Equipment $6,985,798.56  $6,906,778.32  $      79,020.24* 

Aerial  Construction: 

Pole  lines   $  3,525,809.63  $  3,873,436.00  $    347,626.37 

Cable    1,605,654.87  1,546,937.00            58,717.87* 

Wire   3,065,865.09  1,816,676.00       1,249,189.09* 

Total  Aerial  Construction $  8,197,329.59  $  7,237,049.00  $    960,280.59* 

Underground,  etc.: 

Conduit    $  4,371,715.30  $  5,475,288.00  $1,103,572.70 

Cable    5,932,910.74  6,135,690.00           202,779.26 

Submarine   Cable    993.43  993.43* 

House  Cable  53,874.99  175,326.00          121,451.01 

Total  Underground,   etc $10,359,494.46  $11,786,304.00  $1,426,809.54 

Right  of  Way 30,356.94  97,905.00             67,548.06 

Toll  Line  Adjustment 3,406.00              3,406.00 

Total  Plant  in  Operation $33,729,636.39  $33,863,099.23  $    133,462.84 

Construction  in  Process 1,513,525.13  1,589,201.39            75,676.26 

Office  Furniture  and  Fixtures 133,092.79  230,396.41            97,303.62 

Tools  and  Teams 246,320.14  322,639.75            76,319.61 

Working  Capital   (Estimated) 1,750,000.00  1,851,465.51          101,465.51 

Total    $37,372,574.45  $37,856,802.29  $    484,227.84 

Note:    Figures  in  black  with  asterisk  note  decrease. 


78 


APPENDIX  7 — Continued. 

COMPARISON  OF  APPRAISAL  BASE  FIGURES  AND  BOOK  VALUE 

(Chicago  Only) 
As  at  August  1,  1911. 

Book  Value 
Adjusted  Appraisal 


Increase* 
Decrease 


Real  Estate: 

Land $      526,956.61$      955,585.65  $    428,629.04 

Buildings 2,326,931.03  2,015,564.87  311,366.16* 

Total  Real  Estate $  2,853,887.64  $  2,971,150.52  $    117,262.88 

Central  Office  Equipment: 

Operating  Equipment $  4,257,254.40  $  "3,806,604.21  $    450,650.19* 

Furniture  and  Fixtures 73,997.58  70,882.61  3,114.97* 

School   Equipment    13,203.18  16,837.07  3,633.89 

Total  Central  Office  Equipment.. $  4,344,455.16  $  3,894,323.89  $    450,131.27* 

Subscribers  Station   Equipment $  5,848,386.60  $  5,756,119.87  $      92,266.73* 

Aerial  Construction: 

Pole  Lines $  1,136,530.24  $  1,384,151.00  $    247,620.76 

Cable 1,139,427.06  1,044,205.00  95,222.06* 

Wire 1,912,580.42  435,194.00  1,477,386.42* 

Total  Aerial   Construction $4,188,537.72  $2,863,550.00  $1,324,487.72* 

Underground  Construction: 

Conduit    $  3,847,265.79  $  4,665,298.00  $    818,032.21 

Cable    5,200,373.65  5,357,491.00  157,117.35 

Submarine  Cable 993.43  993.43* 

House  Cable   52,685.31  172,640.00  119,954.69 

Total  Underground  Construction.!  9,101,318.18  $10,195,429.00  $1,094,110.82 

Right  of  Way 17,626.77  54,229.00  36,602.23 

Toll  Line  Adjustment 3,406.00  3,406.00 

Total  Plant  in  Operation $26,354,212.07  $25,738,208.28  $    616,003.79* 

Construction   in  Process 1,326,534.32  1,392,861.04  66,326.72 

Office  Furniture  and  Fixtures 106,281.34  212,251.59  105,970.25 

Tools  and  Teams 181,056.75  236,732.65  55,675.90 

Working  Capital  (Estimated) 1,500,000.00  1,462,282.17  37,717.83* 

Total    $29,468,084.48  $29,042,335.73  $    425,748.75* 

Note:    Figures  in  black  Tyith  asterisk  denote  decrease. 


79 

APPENDIX  7— Continued.' 

COMPARISON  OF  APPRAISAL  BASE  FIGURES  AND  BOOK  VALUE 

(Suburban  Only) 

As  of  July  31,  1911. 
Real  Estate: 

Increase 
Book  Value        Appraisal        Decrease* 

Land    $      74,844.53     $    128,372.50     $      53,527.97 

Buildings    241,846.84  244,468.14  2,621.30 


Total  Real  Estate $    316,691.37     $    372,840.64     $      56,149.27 

Central  Office  Equipment: 

Operating  Equipment    $    579,407.60 

Furniture  and  Fixtures 13,934.26 

School  Equipment 


Total  Central  Office  Equipment $    641,622.67  $    593,341.86  $      48,280.81* 

Subscribers  Station   Equipment $1,137,411.96  $1,150,658.45  $      13,246.49 

Aerial  Construction: 

Pole  Lines $2,389,279.39  $2,489,285.00  $    100,005.61 

Cable    466,227.81  502,732.00            36,504.19 

Wire 1,153,284.67  1,381,482.00           228,197.33 


Total  Aerial  Construction $4,008,791.87  $4,373,499.00  $    364,707.13 

Underground,  etc.: 

Conduit     $    524,449.51  $    809,990.00  $    285,540.49 

Cable 732,537.09  778,199.00  45,661.91 

Submarine   Cable    

House  Cable 1,189.68  2,686.00  1,496.32 


Total   Underground,   etc $1,258,176.28     $1,590,875.00     $    332,698.72 

Right  of  Way 12,730.17  43,676.00  30,945.83 


Total  Plant  in  Operation $7,375,424.32  $8,124,890.95  $    749,466.63 

Construction  in  Process 186,990.81  196,340.35  9,349.54 

Office  Furniture  and  Fixtures 26,811.45  18,144.82  8,666.63* 

Tools  and  Teams 65,263.39  85,907.10  20,643.71 

Working  Capital  (Estimated) 250,000.00  389,183.34  139,183.34 


Total    $7,904,489.97     $8,814,466.56     $    909,976.59 

Note:    Figures  in  black  with  asterisk  denote  decrease. 


80 


00 


Q 

» 


p^ 

Si 


EH 

O     'a 


'A 


tt 

w 

o 
P 


H 


p 

t-  o  <M  >o  o  o  C5  C5 

<NtOOi-<OOCOI> 

^2 

O  CO  -t<  C5  O 
O  t-  CO  CO  O 

CO 

"3 

CO(Mi-l*i<<Nt>T-II> 
O-*r~<MtO-<t<OO 

oc  to 

O   CO  (M   t-l  O 
O  O  O  O  O 

CO 

o 

^ 

CO  >O 

O   iH  O5  CM   O 

_ 

W  i-H  t~  O  i—  1  •**  C5   CO" 

(M  i-l 

O   00   00   C5  O 

oo" 

H 

tOCOOO5COt-OOCD 

1-   IM 

u>  o  10  oo  »o 

O5 

41 

05  co  z>  co  i—  i  oo  »o  <M 

CO  O5 

O   00   (M   10  O 

OO 

^ 

W  i-H   1O  J>  O   <M  r-( 

iH   ^J<   W   i—  1    i—  1 

1 

00   O 

•  CO  CO      •               to 

CO  in  O  O  O  O      •  J> 

CO   >O 

•   O5   O5       • 

06 

• 

co'  co     ' 

CO 

rt 

CO   00   rH   Tjt   W   rH       ;  t- 

^   00 

'  tfi   1O       ' 

CO  Tf   O5   OO   *O   <M       [CO 

£-•  00 

|   i—  1    i-H        | 

•     T—f 

o 

co  co  t^c^foo  c^    •  cf 

?>•  co" 

,   £f£*  ^f^~      . 

"0*^ 

.  S 

CO   O5   1O   00   CO   CO       •   TH 
CO   i-H   >O   CO   OO   i—  1 

rH   -t 

.  »o  ^o 

*o      ^^  ^ 

CJ-^J 

~     ^ 

*       I>   kT 

be 

•» 

y  ^ 

SI-      <o"  ir 

cd 

Js-     rf~ 

h 

O> 

TH 

00^  i^ 

_  ^ 

x?l  x?t 

05"^ 

o 

•«*<  t-  to  CO  "^  "^      '  lft 

«o  >n 

00                                     CO   CX 

«£ 

^  ,0   .0 

to'                       >o"t> 

co 
•» 

d 

OOoOOOcOO 

t-   CO   O   !>   CO   CO   O 

*: 

o 

^*   CO    O    l>    "^    W    r-  (    CD 

CO   O 

±1   05   00   T-   O 

05' 

^^ 

M  *o  c0  I-*-  cc  rc  o  ro 

O  i-l 

S  -f  •*  O  O 

O     m 

O^rH   (^   CC    CO   (M    W   ^t* 

C5   t* 

D  C5   t-  OJ  O 

05        vo^, 

3    S 

G$   00   O   !>•   ^   W   Ci   CO 

—    ,  _' 

^  ^   *O   O5   O 

^  r  ^-S- 

f^J   — 

CS   CO   *fj   O   ^   "^   CO   *^ 

to  t> 

O   C^l   OC   00   lO 

(M       0  05 

O    03 

*^  TH   T—i  .CO   W  t**   *O   (M 

CO-QO   < 

D   CO   CD   lO   C 

CO         O   O5 

^  p> 

oj  T-T  »f4"'  f^  cT  c~T  r-T 

—  '    W    C5    i—  1    i—  1 

^f        O    O5 

M 

« 

'   if   CO 

-f        O  i—  i 

««•     I-1 

CM  i—  1  00   CO   O   O       --fOOO5 

OO  00       • 

00 

^  w 

O5  O  i—  1  t>  O  O      -COC5 

O 

•"*<     Tf 

•"1J 

§  "®  t 

ocsSocoS     'roeo 

S 

^  ^    • 

^.         .     . 

•JT!     ^  S 

O   i—  1  CO   10   00  .»O       i  O   CN 

ci 

1—  1  1—*      I 

cS  kC  S 

o"  •**<  ci  o~cTo^   •  co"oi 

*tD 

oo"oo"    • 

oo" 

to 

'3  '**  < 

CO            CO    r*    Tf*    CO        • 

*fc 

•*_•*,    • 

OS      Q> 

iM 

rfl    ^ 

Tj( 

£?  fl 

.J. 

o'Sc 

'O  o  i—  1  —  < 
lH   T-l   00    00 

00 

to 

s 

•* 

jftW^iO«0»      .  0   C 

2  : 

^  :  : 

to 

ffl 

t) 

IH   10                                           ,H 

ft 

B 

OiH^iMggcO"*t~ 

«5   O 

S  S  M  o 

3    *"» 

•  r-H 

C 

^  ?°'   "^  CT    05*   '0%   "   *   ^ 

>0   O 

w  d  g  2 

.       t>    03 
(M         CS    <U 

*  p  1 

O    G5    eft    t^1    ^    ^    c5    CY5    S 

•«*   r*  «i 

o  o  S  £ 

O           (H    J3 

CO    _L_> 

0    o 
O    03 

ill  cf  «f  gii  1  1  i  § 

00    CO       t,^. 
00   C^     -v     .v 

00        -*f    (U, 

1  If 

C 

o 

^^  *1<®"«'e^rt 

H 

ro  co 

co     i  * 

««•     .2  w 

:  :  :              £  £ 

•  :  :  :  •                  :  :  •             *  ^ 

i  ;  :-|  :  :  ;  ;  : 

I  •  I  -  •                 c  a 

;;•  S    .'!;;• 

:  :  .:            EE 

•    •  a  'H    '    '  «>    •    • 

"    CO 

'•  '•  a  f  •  •  «  :  : 

•     •   to 

!     -    s 

•    :  S^a    '    '  £    :    : 

•    •  o 

:  .-  3  .0  :  :  s,  :  a 

•    •  ft 

.  o*-*j  •  •       r— 

P_M 

. 

:  :  *  |  «  :  .2  £  | 

03 

4d 

:  S.2S 

:  :  S  J°  S  :  «  -2  p 
•«fi  ea  '.2'S  " 

'ft 

03 

0 

•  1  §  f 

0        *     O     <]}     Q3     X    "^     JH   rC3 

•*C     "         .  O    tuD  ®    ^    3    fl 

n    bO 

w  a  d  be      °s 

2    '  g  -g  g  .^  S  ^  «  .2  .2 

o~_g.2        o 

q^Occ  WHOOHM^            Eu^ 

81 


V 

i 

e>  »n  oo  to_  q  q  q  >.'i  N  to  q 
to  >c  oi  c  to'  to'  I-H  o  to  t-  o 

CS 

o  -t;  c 
ic  q  q 

IN    rH    O 

00  to  >O 

Oi 

K^ 

Oi   ^f  tO    rH  O   tO   OO   rH   Tf   W   W 

CO 

!>•  00^  C^ 

^•v 

fl""""    _  ^  ^  T~  gT~    —  ^'  £^"    ^J"    lX*  f^    rt       £*• 

W5 

lO  CQ  t> 

kO 

"3 

ritOO   3SS8NW   tO* 

<N 

•+  o  oc 

M. 

o 
H 

»*'          ^ 

CO 

CO 

i 

«500^1-^<OO           •*   OS   >ft 
OO5i-it-CO          OONiN 

t- 

r- 

(N 

t- 

IN   >C    -*'  t^   in   IN           CC   O   N 

ro 

CO 

f- 

a 

'omosor-'O       too~f 

CO 

05 

m~ 

3  • 
O 

1 

t*™   ^l   00   C*J   ^   ^f           rH   rH   CO 

rH     CO    'f    CC    tO 

cT 
q_ 

o" 

IN 

o 

IN 

§0 

* 

V* 

4fc 

le 

CO 

E 

^^ 

V 

jUj 

t. 

o 

f  r        ^,  ,^     !C     ,-           .     I-     I.-S     0          • 

to*     •     • 

^^.      J^ 

pq  <£ 

co 

q  *".     *". 

us 

O  O*         Oi 

C    rH           r- 

s 

g  S  g  g  i  §  S  S  §  S  § 

(N 

CO  -*  O 

N   O   O 

« 

•J 

SS°°el55oSS'§  S 

o 

OS    rH    O 
M   to   «5 

o 
•* 

t>    0* 

«o 

'fi   OO   <M 

'•'"i- 

3    3 

fCi>ro^|C1(*^^(-^^^^'s™ 

o 

?l  c:  X 

0 

« 

^01 

4£ 

M 

\K 

o 

00 

oD—iT-iioco       tor-co 

rfl 

-t- 

-* 

ed 

(Nt-oooco       r-  M  e* 

"". 

1 

Jtf 

O5   Tf<    rf«   CO   *O   tO           *O   CO   CO 
t-CO-^OOOrH           NtOOC 

o 

Q 

o 

a  a  S 

»fl    O    ?*-    CO    OO    rH             &\    W    »C 

to 

CO 

to 

'3  | 

^            "" 

CO 

€«• 

u 

9 

go.S 

.2 

O  c 

r-i    rH    CO    CO 

d 

£-'C 

w  ^_ 

io»oo*^toto    >ooo 

rH       •       • 

t?  S 

d 

o 

>O  «O  in  ~5  O  O  •*  O  1?5  N  O 

to  cs  3j  t-  o  o  o  to  to  q  q 

CO 

OS  -*  O 

to  q  o 

CO 

g  — 

i's 

£ 

00    tO    ^J    (N    O    rH    tO    >O    CO    rH    kC 

o 

C5 

01   tO   1C 

N   00   (N 

CO 

8.1    3 

s  * 

«f  «f  5"  *"•  oo"  o£  £f  jf  ®"  w"  g" 

to 

en  oTt- 

tO   C5   GO 

5f 

'•"'  •*•        ° 

^     r* 

^_    —    ;<;    ^   ^   £,.   -vj   jvj   ^   j^   OQ 

t-   CO   00 

o 

05  5r 

0 

<N   fftfi    OT           rH 

oT 

(N 

(N 

oT 
ot 

c  c 

Q 

**                          ... 

•* 

*    .    . 

"* 

c  c 

H      •      •            ... 

c     •     •         •    ;     • 

E.  ;   :      '.'.'. 

•**    3 

30 

p     Cf      .        .     00        .        .        . 
O     GJ                     00 

s      ;  '.  *  -  •  • 

o 

h 

'3-2    '    i  *H    '.  &>    '. 

05    ^ 

«*H  g  :  c  ®|  :3 

1 

|.a3 

^ 

S  -"  s  :  o  -2  "«  :  'S« 

fij 

82 


ge. 
Am 


Brok 

% 


M 


•N-+J 

Q 

•J  g5 

03  a 

2  C 

'a  g 

a! 

6a^ 

H 


PH 


O 


t-inOOCOCOrHOt-INOO® 


Ot>J>THOOCOCOOOSTH(M 

win^oococoosoioscoco 
co  TH  t-  e^co^os  TH  et  TH 

TH-in>TH> 


«* 


\ 


. 

o*®^-^'-'^ 

^2bcS23H 

-  -g  a  .3      «H  cs  _ 


OS  O  O 

r-i  -^  m 

rH  CO  l> 


CO  CO  OJ 
rH  OS  CO 

(M    T-I    T-I 

cT 


)  OS  !>  CO  O  O 
>  -*  OS  CO  O  O 

o  os  in 

OS  CO  (M 

OS 

CO 

Os  • 

CO   • 

I  •*  in  os  co  co 

>  TH  CO  TH  O  C- 

t-"  HH  CO 

§ 

o  ; 
o  ; 

>  O»  OS  00  •<!<  TH 

OS  £••  HH 

00_ 

CO   . 

(M  O  TH  00  TH 

^  ?> 

C^ 

e*r  • 

OJ  t>  CO  HH  OS 

TH 

m 

in  • 

IN 
>• 

m 

m  • 

;  CO  cO  ^  O  O  *O  O  ^H  O  O 
)   ^H   Q$   rH   O   O   CO    CO   00    Oi   O 

o 
m 

o  in  o 

TH  CO  O 

!Sco«Soo5SScoS 

OS 

0 

Os  O  O 
CO  CO  t> 

)• 

OS 

TH 

o 
o" 

TH 

O  CO  W 
CO  OS  CO 
CO  TH  TH 

oT 

fa- 

o  co  t-  T-I  o  o 

H   CO  CO   t-  O   O 

*^CO 

OS 

r       •*     • 

OS      • 

d      '. 

•   TH  OS   OS   OS   Tfrl 

TH   OS   CO 

HI 

^  ^  os  m  os  •«** 

oo  »n  HH 

Os~ 

OS       " 

iT  co~  c<T  oo**  -^^  c<T 

TH~00~w" 

nT 

-*-*      . 

•5           00   CO   TH  CD 

w 

o 

o    • 

t-  « 

ft 

o  <D 

CS  X 

-    M 


nS^^ooMcoScoo 

CO 

m 

TH  in  o 

01  CO  O 

ilS'liS'i2l*SI 

CO 

CO 

CO  O  O 
i>  ^h  in 
co^co  t- 

^S"lfffs^*f,l 

TH 

00^ 

in^^ror 

in  os  co 

L 

00*~ 

AA. 

oo" 

eA. 

a  .« 

•4J    -U 

a  a 
SS 


CP   _  r3       — i 


t  in  se 
tructio 
king  ca 


Pl 
Co 
W 


83 


APPENDIX  9. 

BUILDINGS. 
Appraisal   Compared   with   Book   Value. 


Increase 
on  Book    Per  cent. 

Appraisal. 

Book  Value 

Value.       Increase. 

Austin  Office    

$      32,962.92 

$      26,004.71 

$     6,958.21 

26.8 

Calumet   Office    , 

49,247.56 

24,412.15 

23,835.41 

93.8 

Canal  Office    

27,313.29 

19,884.71 

7,428.58 

37.4 

Central  Office  

159,214.01 

136,136.78 

23,077.23 

17.0 

Central  Division  Head- 

quarters   

119,685.19 

104,635.37 

15,049.82 

14.4 

Douglas  Office   

45,796.14 

31,385.34 

14,410.80 

45.9 

Edgewater   Office    

62,660.56 

52,884.21 

9,776.35 

18.5 

Harrison   Street  Lot  

325.89 

325.89 

Humboldt   Office    

42,230.51 

30,136.26 

12,094.25 

40.1 

Hyde  Park  Office   

30,354.29 

25,927.09 

4,427.20 

17.1 

Irving  Park  Office  

15,298.80 

14,031.51 

1,267.29 

9.0 

Kedzie  Office    

57,814.62 

49,822.51 

7,992.11 

16.0 

Lake  View  Office    

54,060.15 

44,638.42 

9,421.73 

21.1 

Lawndale  Office  

59,102.70 

46,176.36 

12,926.34 

28.0 

Lincoln  Office  

93,885.52 

74,686.47 

19,199.05 

25.7 

Main  Office  

398,704.76 

385,895.12 

12,809.64 

3.3 

Monroe   Office    

78,871.34 

75,953.19 

2,918.15 

3.8 

North  Office  

65,405.01 

53,653.52 

11,751.49 

21.9 

Northern  Division  Head- 

quarters      

36,061.56 

33,544.00 

2,517.56 

7.5 

Oakland  Office  

71,843.79 

66,958.61 

4,885.18 

7.3 

Pole  Yard,  70th  St.  and 

Monroe    

211.24 

211.24 

South   Chicago   Office  

13,586.23 

8,331.37 

5,254.86 

63.1 

Southern  Division  Head- 
quarters              45,082.41 

Toll  and  Long  Distance 

Building    523,623.16 

Wabash  Office    345,443.69 


Wentworth  Office    

West  Office 

West  Pullman   Office 
Western  Division  Head- 
quarters     

Yard  Office   . 


91,010.01 
52,108.08 
11,492.30 

131.16 

58,878.70 


39,781.77 

490,615.84 

299,056.17 

97,480.08 

47,610.77 

10,505.36 


60,580.42 


5,300.64          13.3 


33,007.32 

46,387.52 

6,470.07 

4,497.31 

986.94 

131.16 
1,701.72 


6.7 
15.5 
6.6 
9.4 
9.4 


Total     $2,642,405.59          $2,351,728.11          $290,677.48          12.4 


84 


APPENDIX  10. 

CHICAGO  TELEPHONE  COMPANY. 

Defense  of  Building  Appraisal. 

Oct.  8,  1912. 
Prof.  E.,  W.  Bemis, 

City  Hall,  Chicago,  111. 
Dear  Prof.  Bemis: 

Building  Costs. 

I  return  herewith  typewritten  table  showing  analysis  of  building  costs,  as 
shown  by  the  Chicago  Appraisal  and  also  the  Chicago  Telephone  Company's 
books. 

As  you  know,  the  costs  of  material  and  labor  entering  into  the  construction  of 
buildings  are  considerably  higher  now  than  in  former  years.  The  low  building 
costs  of  the  earlier  years  of  this  Company 's  history  are  reflected  in  the  higher 
reproduction  new  figures  shown  in  the  appraisal,  except  in  those  instances  where 
one  or  more  additions  have  been  made  to  the  building,  involving  construction  costs 
that  the  appraisers  did  not  make  allowance  for  in  estimating  the  reproduction  new 
cost  of  the  property. 

Land  values  in  Chicago  also  have,  in  general,  increased,  and  such  an  increase 
is  reflected  in  the  higher  present  values  shown  in  the  appraisal  in  practically  all 
cases,  except  where  the  price  paid  for  the  land  included  building  since  destroyed, 
and.  of  course,  not  appearing  in  the  appraisal.  In  such  cases  the  appraisal  of  the 
land  shows  little  or  no  increase,  or  even  a  decrease,  although  land  values  in  the 
vicinity  have  gone  up  since  the  purchase  of  our  property. 

T  will  point  out  some  specific  instances  illustrating  the  above  statements: 
Austin: 

The  appraisal  shows  an  increase  of  27%  in  land  value,  consistent  with  the 
increase  in  land  values  in  this  vicinity.  This  lot  was  purchased  about  ten  years 
apo.  The  building  shows  an  increase  of  26  8%,  which  I  think  fairly  represents  the 
added  cost  of  buildings  to-day  over  the  cost  of  1904,  when  this  building  was 
erected. 

Calumet: 

The  land  for  Calumet  was  purchased,  part  about  1891,  and  part  in  1901,  and 
has  appreciated  very  much,  principally  in  recent  years  since  the  automobile  in- 
dustry has  brought  business  down  into  the  district.  The  appreciation  shown  by 
the  appraisal  is  83.3%.  and  I  believe  it  is  very  fair. 

The  appraisal  shows  an  appreciation  in  the  reproduction  new  cost  of  build- 
ings of  93.8%.  This  is  brought  about  by  the  fact  that  five  old  houses  and  a 
barn  were  bought  with  the  land,  and  were  entered  in  our  books  at  the  estimated 
then  value.  Naturally,  the  appraisal  and  value  of  reproduction  new  would  be 
materially  higher,  and  T  think  that  this,  with  the  higher  present  cost  of  construc- 
tion readily  accounts  for  the  appreciation. 

Canal : 

The  22.8%  increase  in  land  value  is  readily  accounted  for  by  the  increase 
in  values  in  the  district.  The  37.4%  increase  in  building  value  can  be  accounted 
for  by  the  increase  in  building  costs.  This  building  was  erected  in  1903,  when 
building  costs  were  low. 

Central: 

The  Central  Building  was  erected  in  1905,  when  building  costs  were  lower 
than  now,  and  under  a  favorable  contract.  The  appreciation  of  17.4%  I  believe 
to  be  reasonable. 


85 

Central  Division  Headquarters: 

The  Central  Division  Headquarters  and  Cortlandt  street  lots  were  both  pur- 
chased on  very  favorable  terms,  and  land  has  since  increased  rapidly  in  value. 

Douglas: 

This  building  was  erected  in  1903,  when  building  costs  were  much  lower 
than  at  present,  and  the  appreciation  of  45.9%  I  believe  is  reasonable.  Land 
values  in  this  district  are  practically  at  a  standstill. 

Edgewater : 

The  53.6%  increase  in  land  reflects  the  rise  in  land  values  in  this  district. 
Our  lot  was  bought  at  a  favorable  price. 

Harrison  Street  Lot: 

This  lot,  located  at  Harrison  street  and  Pacific  avenue,  just  at  the  edge  of 
the  business  district,  has  increased  very  much  in  value  due  to  the  expansion  of  the 
business  district. 

Humboldt: 

This  building  was  erected  in  1905,  when  building  costs  were  low.  It  was 
constructed  under  a  very  favorable  contract.  Land  prices  have  also  increased. 

Lincoln: 

I  am  advised  that  the  original  price  of  the  land  included  an  old  building  that 
was  afterwards  destroyed.  This  explains  the  apparent  decrease  in  land  value. 
Other  land  in  the  vicinity  shows  some  increase. 

Main: 

The  land  purchased  for  the  original  Main  also  included  an  old  building 
which  was  torn  down.  The  land  value  in  this  instance  would  have  shown  a  slightly 
greater  appreciation,  were  it  not  for  this  fact.  The  main  building  shows  only  a 
small  increase  in  reproduction  cost  because  of  the  fact  that  additions  have  been 
made,  and  the  extra  cost  of  such  additions  is  not  included  in  the  appraisal.  The 
original  building  was  erected  in  1887,  when  building  costs  were  low. 

Monroe: 

The  Monroe  land  shows  a  substantial  increase  in  value,  consistent  with  the 
other  land  values  in  the  vicinity.  The  Monroe  building  shows  a  very  small  in- 
crease in  value.  Here  again,  several  additions  have  been  made  since  the  erection 
of  the  original  building  in  1899.  The  appraisal  figure  does  not  take  into  account 
the  extra  costs  involved;  hence,  little  appreciation  is  shown,  notwithstanding  the 
fact  that  the  original  building  and  some  of  the  additions  were  made  when  build- 
ing costs  were  much  lower  than  at  present. 

North: 

This  building  was  erected  in  1900,  when  building  costs  were  low.  There  have 
been  no  additions.  The  land  shows  a  small  increase  in  value,  and  I  learn  that  land 
values  in  this  district  have  been  nearly  stationary.  It  is  possible  that  an  old 
building  may  have  been  included  in  the  original  price  paid  for  the  land. 

Oakland: 

The  appraisal  figure  for  Oakland  Building  is  but  little  over  the  book  value. 
Several  additions  were  made  to  the  Oakland  Building,  and  the  extra  cost  of  these, 
of  course,  was  not  taken  into  account  in  the  appraisal.  The  estimated  cost  to  re- 
produce new,  the  old  flat  buildings  purchased,  fails  to  much  more  than  make  up 
for  this  deficiency.  Land  values  in  this  territory  have  been  practically  stationary. 

South  Chicago: 

The  appraisal  shows  a  very  small  increase,  only  2.9%,  for  South  Chicago 
land,  notwithstanding  the  general  increase  of  values  in  the  district.  This  is 
accounted  for  in  the  fact  that  the  book  figures  for  land  include  also  the  cost  of 


86 

two  houses  and  a  barn.  One  of  the  houses  was  destroyed  before  the  present 
Central  office  building  was  erected.  The  substantial  increase  in  building  values 
of  63.1%  is  accounted  for  in  the  fact  that  the  original  South  Chicago  Building 
was  erected  in  1902,  when  construction  costs  were  low,  and  further  in  the  fact 
that  the  reproduction  new  estimate  includes  the  cost  of  reproducing  a  house 
and  barn  now  on  the  property,  the  original  cost  of  which  is  included  in  the  land 
value. 

South  Division  Headquarters: 

The  land  values  in  this  district  have  increased  very  much.  The  property  is 
on  the  55th  street  boulevard. 

Toll  and  Long  Distance  Building: 

Although  this  building  was  erected  in  1908,  when  building  prices  were  some- 
what lower  than  now,  the  contract  was  not  a  favorable  one;  it  was  cost  plus 
10%.  As  a  result,  the  appraisal  figure  is  but  6.7%  in  excess  of  the  books. 

Wabash: 

The  land  values  in  this  district  have  greatly  increased  in  the  last  three  or 
four  years  due  to  the  expansion  in  the  business  district.  This  accounts  for  the 
increase  in  value  of  50.8%. 

Wentworth: 

The  original  Wentworth  Building  was  erected  in  1900,  when  building  costs 
were  low.  Several  additions  have  since  been  made,  however,  and  the  appraisal 
fails  to  take  into  account  the  extra  costs  involved.  Because  of  this,  it  shows  a 
decrease  of  6.6%. 

The  land  value  increase  of  31.4%  is  consistent  with  similar  values  in  the 
vicinity. 

West: 

This  building  was  erected  in  1900,  when  construction  costs  were  low.  The 
small  increase  of  9.4%  is  because  the  appraisal  figures  fail  to  take  into  account 
the  extra  cost  of  two  building  additions  made  since  then.  The  land  shows  a 
decrease  of  36%.  While  values  in  this  district  seem  to  have  remained  about  sta- 
tionary, or  may  have  decreased  a  little,  the  large  decrease  in  value  can  prob- 
ably be  accounted  for  in  the  fact  that  an  old  building  was  purchased  with  the 
lot,  and  since  destroyed,  and  is  included  in  the  book  value  of  the  land.  I  am 
unable,  however,  to  verify  this. 

West  Pullman: 

This  building  was  erected  in  1901,  when  construction  costs  were  low.  The 
small  increase  of  9.4%  as  shown  by  the  appraisal  is  accounted  for  in  the  fact 
that  the  figures  do  not  take  into  account  the  extra  cost  of  an  addition  to  the 
building. 

Western  Division  Headquarters: 

The  land  for  these  headquarters  was  bought  on  very  favorable  terms,  and 
land  values  in  the  vicinity  have  gone  up  to  a  marked  extent. 

Yards: 

The  Yards  Building  was  erected  in  1900,  when  building  costs  were  low.  The 
decrease  of  2.8%  shown  in  the  appraisal  is  due  to  the  fact  that  the  appraisal 
figures  fail  to  take  into  account  the  extra  costs  of  making  additions  since  the 
erection  of  the  original  building.  Land  values  in  this  vicinity  have  gone  up  con- 
sistent with  the  appraisal  figures,  showing  increase  of  33.9%. 

Yours  truly, 
(Signed)     J.  G.  WEAY,  Chief  Engineer. 


87 

APPENDIX  11. 

EFFECT  OF  SUBWAY  CONSTRUCTION. 

Oct.  9,  1912 
Professor  E.  W.  Bemis, 

City  Hall,  Chicago,  Illinois. 
Dear  Sir: 

Telephone  Plant  Disturbed  by  Proposed  Passenger 

Subway. 

Referring  to  the  system  of  passenger  subways,  construction  of  which  is  pro- 
posed by  the  Chicago  Harbor  and  Subway  Commission  in  their  report  of  September 
10,  1912,  I  wish  to  discuss  the  plant  of  the  Chicago  Telephone  Company,  which 
will  be  destroyed  or  will  have  to  be  abandoned  on  account  of  the  construction  of 
this  subway  system. 

The  Harbor  and  Subway  Commission  proposes  to  construct  passenger  subways 
in  the  following  streets: 

In  Evanston  avenue  from  Lawrence  avenue  to  Halsted  street. 

In  Lincoln  avenue  from  Lawrence  avenue  to  Clark  street. 

In  Elston  avenue  from  Kedzie  avenue  to  California  avenue. 

In   California  avenue  from  Elston  avenue  to  Milwaukee  avenue. 

In  Armitage  avenue  from  40th  avenue  to  Milwaukee  avenue. 

In  Milwaukee  avenue  from  California  avenue  to  Canal  street. 

In  Halsted  street  from  Evanston  avenue  to  79th  street. 

In  Clark  street  from  Lincoln  avenue  to  Polk  street. 

In  Washington  street  from  Canal  street  to  State  street. 

In  Madison  street  from  40th  avenue  to  Clark  street. 

In  Harrison  street  from  Halsted  street  to  State  street. 

In  State  street  from  the  Chicago  River  to  55th  street. 

In  Blue  Island  avenue  from  Ashland  avenue  to  Halsted  street. 

In  22d  street  from  Marshall  boulevard  to  Ashland  avenue. 

In  26th  street  from  40th  avenue  to  Marshall  boulevard. 

In  55th  street  from  Western  avenue  to  Cottage  Grove  avenue. 

In  Cottage  Grove  avenue  from  55th  street  to  79th  street. 

There  will  also  be  several  short  connecting  lines  which  I  have  not  enumerated. 

The   construction   of  these  passenger   subways   will   necessitate   the   abandon- 
ment and  removal  of  a  rather  large  amount  of  telephone  underground  conduit  and 
underground  cable,  and  I  will  enumerate  below  the  general  locations  and  amounts 
of  underground  plant  which  will  be  involved. 
In  Evanston  Avenue: 

From  Berteau  avenue  to  Halsted  street  2  ducts  of  conduit  and  1  cable. 

In  Lincoln  Avenue: 

From  Cullom  avenue  to  Belle  Plaine  avenue  4  ducts  of  conduit  and  1  cable. 

In  Elston  Avenue: 

From  Kedzie  avenue  to  California  avenue  6  ducts  of  conduit  and  2  cables. 
In  Milwaukee  Avenue: 

From  California  avenue  to  Western  avenue  an  average  of  9  ducts  of  conduit 
and  5  cables. 

From  Western  avenue  to  Robey  street  an  average  of  6  ducts  of  conduit  and 

1  cable. 

From  Noble  street  to  Chicago  avenue  16  ducts  of  conduit  and  4  cables. 
From  Chicago  avenue  to  Halsted  street  28  ducts  of  conduit  and  3  cables. 
From  Halsted  street  to  Canal  street  an  average  of  10  ducts  of  conduit  and 

2  cables. 


88 

In  Halsted  Street: 

From  Grace  street  to  Addison  street  2  ducts  of  conduit  and  1  cable. 

From  Wrightwood  avenue  to  Belden  avenue  an  average  of  6  ducts  of  conduit 
and  2  cables. 

From  Shades  place  to  Blackhawk  street  4  ducts  of  conduit  and  1  cable. 

From  Kees  court  to  Division  street  1  duct  of  conduit  and  1  cable. 

From  Chicago  avenue  to  Madison  street  an  average  of  5  ducts  of  conduit  and 
3  cables. 

From  Madison  street  to  Harrison  street  18  ducts  of  conduit  and  5  cables.  ' 

From  Harrison  street  to  12th  street  18  ducts  of  conduit  and  2  cables. 

From  12th  street  to  the  South  Branch  of  the  Chicago  River  an  average  of  16 
ducts  of  conduit  and  2  cables. 

From  the  South  Branch  of  the  Chicago  River  to  26th  street  12  ducts  of  conduit 
and  2  cables. 

In  California  Avenue: 

From  Wrightwood  avenue  to  Milwaukee  avenue  3  ducts  of  conduit  and  1  cable. 

In  Clark  Street: 

From  Lincoln  avenue  to  Division  street  an  average  of  17  ducts  of  conduit  and 

11  cables. 

From  Division  street  to  Chicago  avenue  an  average  of  27  ducts  of  conduit 
and  11  cables. 

From  Chicago  avenue  to  Illinois  street  an  average  of  24  ducts  of  conduit  and 

12  cables. 

From  Illinois  street  to  Kinzie  street  18  ducts  of  conduit  and  15  cables. 

From  South  Water  street  to  Washington  street  an  average  of  10  ducts  of 
conduit  and  1  cable. 

From  Washington  street  to  Van  Buren  street  an  average  of  15  ducts  of  conduit 
and  4  cables. 

In  Madison  Street: 

From  40th  avenue  to  Central  Park  avenue  an  average  of  7  ducts  of  conduit  and 
6  cables. 

From  Central  Park  avenue  to  Sacramento  avenue  an  average  of  10  ducts 
of  conduit  and  6  cables. 

From  Ashland  avenue  to  Canal  street  an  average  of  30  ducts  of  conduit  and 
17  cables. 

In  Harrison  Street: 

From  Halsted  street  to  Clinton  street  12  ducts  of  conduit  and  3  cables. 

From  Clinton  street  to  5th  avenue  an  average  of  14  ducts  of  conduit  and  7 
cables. 

From  5th  avenue  to  Sherman  street  18  ducts  of  conduit  and  12  cables. 

From  Sherman  street  to  Clark  street  48  ducts  of  conduit  and  12  cables. 

From  Clark  street  to  State  street  an  average  of  25  ducts  of  conduit  and  16 
cables. 

In  Blue  Island  Avenue: 

From  Harrison  street  to  12  street  8  ducts  of  conduit  and  2  cables. 
From  12th  street  to  14th  street  8  ducts  of  conduit  and  3  cables. 
From  14th  to  19th  street  10  ducts  of  conduit  and  4  cables. 
From  19th  to  22d  street  6  ducts  of  conduit. 

In  26th  Street: 

From  Whipple  street  to  Springfield  avenue  an  average  of  3  ducts  of  conduit 
and  1  cable. 

In  State  Street: 

From  Madison  street  to  Van  Buren  street  6  ducts  of  conduit  and  2  cables. 
From  26th  street  to  27th  street  4  ducts  of  conduit  and  1  cable. 
From  Root  street  to  43d  street  7  ducts  of  conduit  and   1   cable. 


89 

In  Cottage  Grove  Avenue: 

From  55th  street  to  63d  street  an  average  of  8  duets  of  conduit  and  1  cable. 

From  63d  street  to  69th  street  8  ducts  of  conduit  and  2  cables. 

From  69th  street  to  71st  street  8  ducts  of  conduit  and  3  cables. 

From  71st  street  to  75th  street  3  ducts  of  conduit  and  2  cables. 

From  75th  street  to  79th  street  7  ducts  of  conduit  and  1  cable. 

The  passenger  subway  as  proposed  at  numerous  locations  will  occupy  the 
same  streets  occupied  now  by  the  Telephone  Company  with  its  main  conduit  and 
underground  cable  leads;  and  incident  to  the  destruction  of  these  main  telephone 
underground  leads,  it  will  be  necessary  to  abandon  certain  subsidiary  intersecting 
underground  conduit  and  cable  leads  that  now  cross  the  proposed  subway. 

We  estimate  that  the  loss  to  the  Telephone  Company,  due  to  the  destruction 
of  its  underground  plant  in  those  streets  which  the  proposed  passenger  subway 
will  occupy,  and  the  necessary  abandonment  of  subsidiary  underground  conduits 
and  cables,  will  amount  to  approximately  $1,840,000.00.  This  amount  is  made  up 
of  two  items;  namely, 

Underground    Conduit    675,000.00 

Underground  Cable   675,000.00 

In  considering  the  estimate  for  the  loss  of  underground  cable,  account  has 
been  taken  of  the  net  salvage  return,  that  is,  gross  salvage  less  the  cost  of  re- 
moving the  cables,  which  could  be  obtained  upon  the  cables  involved. 

With  underground  conduit  there  would  not  be  any  salvage  value  and  it  is 
further  assumed  that  it  would  be  unnecessary  for  the  Telephone  Company  to 
remove  it  from  the  streets. 

In  addition  to  the  above  amount,  which  covers  the  direct  loss  of  plant  de- 
stroyed, it  would  be  necessary  to  do  a  large  amount  of  temporary  work  during  the 
construction  of  the  subways  in  maintaining  our  service  in  various  crossings  over 
the  obstructed  streets.  In  a  number  of  instances  the  proposed  subways  will  prac- 
tically cut  our  exchange  districts  into  halves  and  it  will  be  necessary  of  course  at 
all  times  to  maintain  sufficient  crossings  to  enable  us  to  give  service  to  all  sub- 
scribers. We  estimate  that  this  item  will  amount  to  $250,000.00. 

These  two  items,  of  direct  loss  on  plant  destroyed,  and  the  expense  incident  to 
maintaining  service  during  actual  subway  construction  work,  together,  amount  to 
$2,090,000.00  and  this  figure  would  represent  the  estimated  total  loss  to  the  Tele- 
phone Company  on  account  of  the  construction  of  passenger  subways  in  these 
streets. 

All  the  above  estimates  have  been  made  on  the  basis  of  present  telephone 
plant.  In  a  great  many  instances,  especially  where  main  telephone  routes  are 
involved,  the  provision  of  required  telephone  facilities  will  necessitate  the  installa- 
tion of  several  large  sized  telephone  cables  in  each  year,  and  any  delay  in  the 
construction  of  the  subways  will  result  in  substantial  increases  in  the  losses  inci- 
dent to  the  abandonment  and  destruction  of  the  telephone  plant  involved. 

I  would  estimate  that  the  losses  which  will  be  involved  in  subway  construc- 
tion as  above  outlined,  will  increase  at  the  rate  of  at  least  $100,000.00  per  year. 

Yours  truly, 

(Signed)     J.  G.  WRAY, 
CB:ET  Chief  Engineer. 


90 


APPENDIX  12. 


THE   PLANT   AND   HOW   PAID   FOE,* 


Investment 

Capital 

Reserve  for 

Total 

Year. 

Dec.  31st. 

Stock.     Bonds. 

Depreciation. 

Liabilities. 

1881 

$   493,465.99 

$   500,000 

$   500,000.00 

1882 

563,575.19 

500,000 

500,000.00 

1883 

623,606.72 

600,000 

600,000.00 

1884 

654,743.16 

693,000 

693,000.00 

1885 

732,888.05 

762,300 

762,300.00 

1886 

805,318.72 

838,600 

838,600.00 

1887 

977,035.47 

964,400 

964,400.00 

1888 

1,131,342.03 

1,089,800 

1,089,800.00 

1889 

1,302,625.49 

1,253,300 

l',253,300.00 

1890 

1,734,212.73 

1,754,700 

1,754,700.00 

1891 

2,310,519.66 

2,000,000 

2,000,000.00 

1892 

3,415,023.37 

3,280,200 

3,280,200.00 

1893 

4,001,039.55 

3,796,200 

3,796,200.00 

1894 

4,159,989.38 

3,796,200 

$  120,000.00 

3,916,200.00 

1895 

4,521,439.29 

3,796,200 

200,889.40 

3,997,089.40 

1896 

4,607,909.34 

4,336,500 

200,889.40 

4,537,389.40 

1897 

4,545,729.82 

4,336,500 

100,000.00 

4,436,500.00 

1898 

5,174,748.47 

4,336,500 

474,782.22 

4,811,282.22 

1899 

6,615,922.64 

5,000,000 

903,934.14 

5,903,934.14 

1900 

8,122,052.61 

7,000,000f 

421,172.53 

7,421,172.53 

1901 

9,933,480.47 

9,000,000 

296,432.87 

9,296,432.87 

1902 

12,333,854.20 

11,993,400 

346,551.32 

12,339,951.32 

1903 

13,909,268.38 

14,000,000 

646,551.32 

14,646,551.32 

1904 

14,593,186.16 

14,000,000 

913,825.83 

14,913,825.83 

1905 

15,930,664.83 

14,000,000 

1,295,155.61 

15,295,155.61 

1906 

18,683,669.11 

14,000,000 

1,692,066.24 

15,692,066.24i 

1907 

27,007,758.41 

16,908,500 

1,899,613.46 

18,808,113.46^ 

1908 

29,090,647.83 

27,000,OOOU 

1,901,739.85 

28,901,739.25 

1909 

31,001,017.78 

27,000,000   $0,000,000 

1,901,739.25 

33,901,739.25 

1910 

33,737,612.48 

27,000,000    5,000,000 

3,695,160.95 

35,695,160.95 

1911 

37,137,217.75 

27,000,000    5,000,000 

4,971,823.19 

36,971,823.19 

*Working  capital  for  which  the  Company  claims  about  $1,900,000  is  here  omit- 
ted because  the  exact  increase  from  year  to  year  cannot  be  definitely  ascertained. 
All  of  the  existing  working  capital,  however,  must  have  been  accumulated  out  of 
earnings.  The  figures  are  taken  from  Hagenah's  balance  sheets  down  to  1900 
and  thereafter. 

f$l,000,000  was  a  stock  dividend. 

JThe  following  balance  must  be  taken  into  account  for  the  years  1906  and  1907: 

1906.  1907. 


Surplus   $1,073,338.67 

Loans  from  bankers   250,000.00 


$5,109,942.69 
1,385,000.00 


t[$4,500,000  was  a  stock  dividend. 


$1,323,338.67          $6,494,942.69 


91 


APPENDIX  13. 

THE    COMPANY'S    TREATMENT    OP   DEPRECIATION. 
(From   Hall's   Report,   pp.    20-23.) 

Whatever  may  have  been  the  ruling  policy  as  regards  the  anticipation  of 
the  future,  the  records  show  that  a  reserve  for  deferred  maintenance  was  inau- 
gurated in  1894  to  which  certain  annual  credits  were  made,  emanating  from  the 
maintenance  accounts.  These  credits  continued  until  1907  and  amounted  to 
$6,765,595.05,  made  up  as  follows: 

Calendar  year.  Amount. 

1894  $  120,000.00 

1895  100,000.00 

1898  374,782.22 

1899  429,151.92 

1900  329,702.13 

1901  357,919.39 

1902  503,304.95 

1903  600,000.00 

1904  1,267,274.51 

1905  1,187,566.10 

1906  1,245,893.83 

1907  250,000.00 


$6,765,595.05 

Of  this  amount,  however,  $1,575,000.00  was  transferred  to  surplus,  leaving  a 
net  credit  of  $5,190,595.05  as  a  fund  ostensibly  for  the  dual  purpose  of  providing 
for  deferred  maintenance  and  for  contingencies.  Doubtless,  owing  to  this  two- 
fold character,  certain  sums  were  charged  each  year  to  the  fund  and  deducted 
from  the  investment  account,  representing  estimated  depreciation  which  has  taken 
place,  while  a  steadily  increasing  balance  was  allowed  to  remain  in  the  fund, 
accumulating  to  $1,836,714.26  at  the  close  of  1907.  The  following  summary  shows 
the  position  with  regard  to  the  fund,  December  31,  1907: 
Net  amount  credited  to  fund $5,190,595.05 

Less:  Estimated  depreciation  written  off  investment 
as  follows: 

1895  $  19,110.60 

1897  100,889.40 

1900  412,463.74 

1901  469,612.35 

1902  300,000.00 

1903  . '. 300,000.00 

1904    500,000.00 

1905    400,000.00 

1906    700,000.00 


$3,202,076.09 
Adjustment    of   maintenance   accounts,   supplies,   etc..       151,804.70        3,353,880.79 


Balance  at  credit  of  fund  December  31,  1907 $1,836,714.26 

It  might  be  inferred  from  the  above  that,  inasmuch  as  the  investment  was 
being  written  down  to  the  extent  of  the  above  charges,  the  actual  depreciation 
of  the  plant,  over  and  above  replacements  each  year,  was,  in  the  opinion  of  the 
management,  developing  with  considerable  momentum.  That  this  view  was  not 
altogether  steadfast  is  apparent  from  the  fact  that  at  December  1,  1907,  the  whole 
of  these  deductions,  together  with  certain  other  credits  to  investment  account 
which  were  charged  direct  to  maintenance  and  to  surplus,  were  reversed,  leaving 


92 

the  investment  at  its  original  book  cost.  As  a  result  of  this  transaction  the  plant 
account  was  increased  by  the  sum  of  $3,767,233.55,  this  amount  being  credited  to 
the  surplus  account  in  place  of  the  above  reserve,  which  had  contributed  practic- 
ally the  whole  of  the  amount.  Looking  to  the  fact  that  this  credit  to  surplus 
account  was  diverted  from  its  primary  purpose  to  serve  as  a  means  to  an  end 
diametrically  opposite,  namely,  the  distribution  of  a  stock  dividend  of  $4,500,- 
000.00  in  the  following  year,  little,  if  any,  importance  can  be  attached  to  its  treat- 
ment in  the  accounts  of  the  company  as  having  any  bearing  on  the  question  of 
depreciation.  Neither  can  any  significance  be  attached  to  the  balance  of  $1,836,- 
714.26  remaining  in  the  reserve  fund,  as  indicative  of  the  physical  condition  of  the 
plant  at  that  time.  It  may  have  been,  and  doubtless  was,  regarded  as  the  nucleus 
of  the  fund  now  standing  in  the  books. 

The  history  of  the  fund  from  January  1,  1908,  to  the  present  time  may  best 
be  seen  from  the  following  synopsis  showing  how  the  fund  at  December  31,  1911, 
namely,  $4,971,823.19,  was  accumulated: 

Balance  at  credit  January  1,   1908 $1,836,714.26 

From  reserve  for  depreciation  of  buildings — balance  as 

at   December   31,    1908    62,899.20 

Sundry   credits    added   in    1908 2,125.79 

From  surplus — balance  as  at  December  31,  1909 847,068.84 

From  maintenance — 1910   $1,500,000.00 

Less:    Eeconstruction   and   replacements 553,647.14           946,352.86 


From    maintenance — 1911     $1,620,000.00 

Less:   Eeconstruction  and  replacements    445,211.75 


1,174,788.25 
Sundry  credits  added  in  1911   101,873.99 


Balance  at   credit,   December   31,   1911 $4,971,823.19 


It  will  be  observed  that  the  credit  of  1909  consisted  of  a  transfer  of  the 
balance  in  surplus  account  at  the  close  of  that  year.  The  credits  for  1910  and 
1911  appear  to  have  been  regulated  substantially  by  the  balance  of  profit  re- 
maining after  meeting  all  expenses  and  the  eight  per  cent,  dividend,  the  undivided 
profit  added  to  surplus  for  each  of  these  years  amounting  to  $95,072.93  and  $102,- 
540.31,  respectively.  In  view  of  all  the  facts  concerning  this  fund,  it  is  perhaps 
not  irrational  to  regard  it  as  a  general  reserve  for  the  purpose  of  providing  for 
contingencies  and  for  automatically  regulating  the  dividend.  Whether  or  not  this 
fund  is  adequate  for  the  present  purpose  may  perhaps  be  best  judged  from  the 
experience  of  the  company  in  the  past  in  regard  to  actual  expenditures  for  main- 
tenance and  renewals.  This  consideration  may  be  regarded  as  an  element  affect- 
ing the  present  value  of  the  plant,  the  other  two  elements,  referred  to  on  page  17, 
having  also  to  be  taken  into  account  in  determining  the  sufficiency  of  the  fund  in 
its  complete  aspect. 

This  more  direct  view  of  the  question  may  be  obtained  in  a  study  of  the 
actual  expenditures  in  the  past  in  respect  of  repairs  and  renewals.  The  percentage 
of  the  average  annual  expenditure  thus  ascertained,  to  the  investments  which  do 
depreciate  may  be  regarded  as  the  basis  for  the  annual  allowance  to  be  set  aside 
for  the  purpose  in  view.  It  should  be  observed  that  it  is  not  possible  to  differ- 
entiate between  current  repairs  and  reconstruction  outlay  until 'within  the  last 
seven  or  eight  years.  It  is  reasonable,  however,  to  assume  that  although  this 
period  may  not  be  sufficiently  full  to  determine  an  average  for  reconstruction, 
it  may  be  regarded  as  of  sufficient  duration  to  give  the  average  for  current  annual 
repairs.  The  average  for  the  total  expenditure  being  determinable,  it  is  thus 
possible  to  deduce  the  average  for  reconstruction  outlay  indirectly. 


93 


CO  O 

CO   O 

CO  CO 

tO           O                         v^ 

•»f  m 

OS   «O 

O          O                       0s*                     *f~- 

* 

IN 

GO'  to' 

O    rH 

IN   O 

O    rH 
CO   00 

_;                  m  *#       t-  in 

2         §                       OS  CS          00  CM 

C<8           O                           US   rH           t1-   CO 

N  CM                •*         CXI 
rH    rH                   4X1           tO 

»"H   CM                   CO           1^ 

05 

os"co" 

CO^r-^ 

^""HS" 

o1     o" 

rH                              rH 

rH 

rH    tO 

CO   'f 

CXI    rH 

-f         O 

CM  O5 

co^      q_ 

T-T 

5M 

co" 

co^      oT 

rH   rH 

0  0 

O  CO 

CO          CO  tO                vS 

OS   US 

O  O 

CM         CO  t> 

rH 

CXI   OS 

0    T-H 

CO'   r-J 
IN  CO 

us'       t^  «x«             2  J^        S  S 

tO   GO                  ^          tO 
CO   CO                  N          CO 

rH 
OS 

t-»   00 

"^1 

^          -^-   W                  US   rH          t-^  m 

0   W                  CO          r4 

rH 

oo"cT 

to  ^t* 

o  in 

tO*"         IN~uT 

O   00 

co  r^ 

rH    rH 

IN          O  rH 

us^eo 

00  OS 

00^  tO 

. 

rH 

r^s 

cxT 

co"      >os  os 

/ 

^ 

IN   IN 

rH    „ 

if)  O 

»o  o 

m  o 

us  o 

in       cxt  to            v» 

«S           CO  O                  <> 

w 

IN  ext 
t-  t- 

•*'  CO 
Tjt  t» 

W  0 

Ol   CO 

•       *sT   X            t—  to       co  ~f 
in       t*  oo            ^oo       co  *t 

l>  1-1                  O>          9t 

Ml 

0 

CO   CM 

to  co 

0  t- 

^.          tO   tO                  to'  rH          GO   CO 

rH   ?1                   CO           C* 

PH 
W 

OS 

IN   rH 

O   CO 

CO  O 
CO  O 

co  o 

«T     cToo" 

CO          CM  •* 

-T- 

00 

rH 

m  Tt< 

OS   GO 

t>^us 

E 

w 

rH 

rH 

cxT 

co"      co"  to" 

rM 

M 

^ 

(N  C\» 

w 

0 

4-r 

C"1 

t-  m 

CM 

IN  O 

N          US  O                 vS 

., 

q  q 

O          -^   CO                  6^ 

00 

jj    O 

CO  IN 

i 

<N  O 

rH    0 

_;           -vJ   -J                   -H   rH           •* 

S     S5co        ".«-.     rt.  0 

t>          O   IN                  US   CO          OS   ^ 

rH   O                   tO 
OS*  rH                  C 

rH     E""1 

O5 

cTcxT 

co~o 

p^r-T 

^T      co"oT 

1—1 

^^ 

O 

tO    rH 

t- 

t-  CO 

o       co  •*** 

14    Q      • 

OS 

rH   00 

OS  CO 

CO_         U5  C<»^     . 

«    O   £> 

1—  1 

r-T 

rH~ 

<N           rH   ^J*    ^J 

hrf      ^j 

CM  CM  -g 

s«s 

l» 

8 
ft 

o 

APPEl 

NANCE  AN 

CO 

O 
OS 

rH 

CO   tO 
rH   CO 
•*'   CO 
•*   IN 

00   t- 

q^co 

,960,672.99 
0 

,960,672.99 
248,624.00 

£ 

OS          tO   US  "          v» 

OS         OS  CO   ,,         C^ 

ro              ^    ^   S             tO    N              GO     _ 
S           t2§r3           ^^           *! 

o"      -*"io""S 

°           N   5    * 

-                   •         •     £i 

00 
00   S>J                    O           rH 

tO   S>!                  c-. 

Si"  rn"                C 

W 

rH 

rH 

i—  i 

e\i      o  w  5T 

H 

««• 

N  CM  Q 

T3 

i—  i 

• 

2  1    ;S 

®                 S           t- 

3 

C 

V 

a       o        .  «-< 

O          -u             .    g 

®                   Ox            O 

OQ 

'-G       ac       •  i! 

SO                     **           '~* 

£ 

33       a         ;  ^5 

V.                   aj           S 

C 

Mr—                 .O 

1           '|M 

a            £       g 

"3              g                 '     « 

2                 - 

a       w         •  aj 

2 

"o 

c3         «           •  S) 
BJ                            *  fl                                         ?* 

1         1     ^ 

D 

§^"                               C 

Q^              efi        ^ 

® 

** 

S 

—  _               "™           S 

> 

® 

*      a      ^  2                   S 

cT              4          =! 

ft  <      — 

ID 
® 

r3 

rt           S               *                                               ~* 

E          ^      ^ 

S 

a           ^3       > 

cS                           ^ 

a 

"2        o        ID                             t5 

•S                 ® 

.2 
"3.S 

U 
a 
• 

-1-*                      t_                       M                                                                                                _a 

33        S.       a                          *  .2 

'«            ff)          to                                       "3  '« 

®      -2       ®                      fe  £ 

®           «       a    0 

S           a^-E7 
sj             ci  «          • 

&  « 

Cj         ^             •*                      '                       5     C< 

a            e  >  x  * 

2  £ 

®   as 

5T      .2       .2                          a   a> 

O>    OC            ®    O    Jj 

C 
O 

!| 

.sl 

at    O 

oT       ^        ^                         _      o 

'5  o       cs  *•  ®"^ 

.&1 

15 

S  | 

^  &  ®       &                         a 

a  S       a  c  ~  ^ 

°fc< 

O 

OD 

9 

99 

r3 
x    O 

»-t   (-. 

^~*  c 

cS  eS       _,£                       _so 
•|o§D§M               £g         _2.J 

«2  a      *°  1  *  H 

O 

'5  ® 
C*  a 

®    V 

«« 

QJ    fg 

«<J 

_  o 
«•£ 

"5.3 

EH  .33 

aaj,-o^          '5®       s^; 

•-  H              O>              O                      CM   S              A^ 
M            p.            >                   Q5    uj           Ci  "3 

S       <3       <           K«       »< 

11      1       ^ 

Hoc      H      K 

94 


APPENDIX  15. 

COMPOSITE  LIFE,  SALVAGE  AND  ANNUAL  DEPEECIATION. 

230  West  Washington  Street,  Chicago,  October  24,  1912. 

Prof.  E.  W.  Bemis,  City  Hall,  Chicago. 
Dear  Sir: 

Depreciation. 

Since  talking  to  you  this  noon  we  have  checked  over  our  depreciation  figures 
very  carefully  and  find  the  following: 

Chicago  Telephone  Company. 

Appraisal  Value  of  Plant  as  of  August  1,  1911. 

Chicago  Exchange. 


Chicago  Telephone  Byllesby  &  Arnold 

Life  and  Salvage.  Life  and  Salvage. 

Composite  Life 5.260%  4.068% 

Salvage    29.234%  22.863% 

Annual  depreciation  allowance 13.455   years  18.961   years 


Book  Values  of  Plant  as  of  August  1,  1911. 
Chicago  Exchange. 

Chicago  Telephone        Byllesby  &  Arnold 
Life  and  Salvage.          Life  and  Salvage. . 

Composite  life   12.802  years  18.318  years. 

Salvage    29.196%  22.542% 

Annual  depreciation  allowance 5.531%  4.228% 

Note: — The  percentages  in  the  above  tables  are  based  on  total  plant  in  serv- 
ice, including  land,  but  not  including  working  capital,  construction  in  process, 
tools,  teams  and  supplies,  and  furniture  and  fixtures.  The  depreciation  allow- 
ance is  figured  on  straight  line  basis.  Salvage  is  made  to  include  land  and  in- 
stallation of  subscribers'  instruments. 

Yours  truly, 
JGW— FF  (Signed)     J.  G.  WEAY,  Chief  Engineer. 


95 


APPENDIX  16. 

QUANTITIES  OF  PHYSICAL  PLANT  IN  CHICAGO  AND  SUBURBAN 

TERRITORY,  CHICAGO  TELEPHONE  COMPANY. 

As  of  August  1,  1911,  According  to  Appraisal. 

ACCOUNT  103— REAL  ESTATE. 

Chicago.       Suburban.      Total. 

103-20  Land: 

No.  of  tracts 34  22  56 

103-10  Buildings: 

Office  buildings 24  14  38 

Flat   buildings    2  . .  2 

Division   headquarters    4  . .  4 

Switch  tracks   1  . .  1 

Barns   2  3  5 

Miscellaneous    .  516 


Total   .  38 


18 


56 


105— EQUIPMENT. 
17— CENTRAL  OFFICE  OPERATING  EQUIPMENT. 


CHICAGO. 

SUBURBAN. 

TOTAL. 

2  +2              'eS  S            "3 

O    CS                    O    CS                 O 

opq          ,jpq        H 

!«?       *'?. 

B    0>                       —  >    4>          •      r-5 
S-M                    CS  -^        I      cS 
•*j               E  •*«      1   j3 

O   CS                       O    CS                O 

O  W              »JPQ          H 

Common 
Battery. 

cS  -<J 
O  cS 
-  ^ 

CS 

& 

O 

Subscribers: 

Sections  417  1/3          22     439   1/3 

82   1/3        126     208   1/3 

449  2/3 

148 

647  2/3 

Positions       1252          22            1274 

227       126              353 

1479 

148 

1627 

Subs.  Ans.  Jack 

Lines       139830     1414     141244 

29020     6832          35852 

168850 

8246 

177096 

Trunks: 

• 

Sections           270 

270 

270 

Positions          555 

555 

555 

Trunks          19393       206 

19393 

19599 

Toll: 

Sections      61  2/3 

33  2/3 

95  1/3 

95  1/3 

Positoins          124 

91 

215 

215 

Toll  lines         650 

790       702 

1440 

702 

2142 

105— EQUIPMENT. 
18— STATION  APPARATUS. 


96 


Chicago.       Suburban.         Total. 


Stations   254742  64118  318860 

105-08— SUBS.  STATION  EQUIPMENT. 
38— DEOP  WIRES. 

Drops 161825          60452  222277 

105— EQUIPMENT. 
48— INTERIOR  BLOCK  WIRES. 

No.    IS    Twist.      Pair: 305897ft.          51994ft.          357891ft. 

105— EQUIPMENT. 
58— PRIVATE  BRANCH  EXCHANGES. 

Switchboards     2639  166  2805 

Local  lines 57131  3509  60640 

Trunk  lines   .  15549  644  16193 


SUMMARY  OF  107—109  ACCOUNTS. 
EXCHANGE  AND  TOLL  LINES. 


Sub.  SUBURBAN.  CHICAGO. 

Acct.       Item.  Quantity.  Unit.   Quantity.  Unit. 


TOTAL. 
Quantity.  Unit. 


01  Pole  Lines  229195  Poles.  81822  Poles 

02  Aerial  Cable  29767.60  Cond.  Mi.  56324.29  Cond.  Mi. 

03  Aerial  Wire  37247.51  Cond.  Mi.  7920.86  Cond.  Mi. 

14  U.  G.  Conduit  2218889  Duct.  Ft.  12069228    Duct.   Ft. 

Main 

24  U.  G.  Conduit  271999    Duct.   Ft.  913399    Duct.    Ft. 

Subsidiary 

15  U.    G.    Cable  52665.17  Cond.  Mi.  518299.13  Cond.  Mi. 

Main 

25  U.  G.  Cable  4526.02  Cond.  Mi.  21562.58  Cond.  Mi. 

Subsidiary 

35     House  Cables  1000  Pairs.  43885    Pairs. 


311017    Poles. 
86091.89  Cond.  Mi. 
45168.37  Cond.  Mi. 
.14288117  Duct.  Ft. 

1185398  Duct  Ft. 

570964.30  Cond.  Mi. 
26088.60  Cond.  Mi. 

44885  Pairs. 


112— TOOLS  AND  VEHICLES. 


Chicago.       Suburban.       Total. 


02  Teams  and  Vehicles: 

Outfits    

Horses 

Vehicles    , 

03  Motor  Vehicles: 
Auto,  and  Motorcycles. 


216 
221 


45 


71 


40 


71 
216 
221 

85 


UJ  Ci 

ui  uj  z 

I ,     uj 

^      2    UI  I    OC 
O 


CO 


CO 


98 

APPENDIX  18. 

CITY  PUECHASE. 

Being  Section  16  of  Ordinance  Regulating  Telephone  Charges  in  the 
City  of  Chicago,  November  6,  1907. 

16.     Eight  to  Purchase  Plant  Reserved  by  City — Price  Fixed  by  Appraisers. 

The  City  of  Chicago  shall  have  the  right  on  the  first  day  of  January,  1919, 
or  on  the  first  day  of  January,  1924,  or  within  thirty  (30)  days  after  either  of 
said  dates,  if  it  shall  so  elect,  to  terminate  the  grant  of  privileges  of  said  Chicago 
Telephone  Company  conferred  hereby,  and  on  either  of  the  said  dates,  or  at  the 
expiration  of  the  term  hereof,  or  within  thirty  (30)  days  after  either  of  the  times 
mentioned,  to  take  over  for  municipal,  state  or  federal  operation  the  plant  and 
system  of  the  grantee,  or  its  successor  or  successors,  including  the  property  here- 
inafter mentioned;  provided  that  twelve  (12)  months'  previous  notice  in  writing 
shall  have  been  given  of  the  intention  of  the  City  to  take  over  the  telephone 
plant  and  system  of  the  grantee,  or  its  successor  or  successors,  within  the  City  of 
Chicago,  including  all  appurtenances,  appliances,  equipment,  lines,  leaseholds, 
buildings,  stores,  furniture  and  fixtures,  suitable  to  and  used  by  it  for  the  pur- 
poses of  this  grant,  taking  into  consideration  the  then  condition  of  the  art,  and 
,  in  the  event  that  the  City  Council  shall  so  terminate  this  grant,  or  that  said  grant 
shall  have  expired,  and  the  City  Council  shall  take  over  the  property  of  said 
Company  above  mentioned,  then  the  City  shall  pay  therefor  in  cash  the  then  cost 
of  the  duplication,  taking  into  consideration  the  then  condition  of  the  art,  less 
depreciation,  of  said  telephone  plant  and  system  and  other  property  aforesaid, 
together  with,  if  the  said  grant  shall  not  then  have  expired,  five  per  cent.  (5%) 
thereon  in  addition  as  compensation  for  the  compulsory  sale,  but  there  shall  be 
no  allowance  for  earning  power,  or  for  the  value  of  the  rights  and  privileges 
hereby  granted,  or  for  any  franchise  or  license  value. 

In  the  event  that  the  City  shall  desire  to  purchase  the  property  of  the  com- 
pany within  the  City  of  Chicago,  as  aforesaid,  the  purchase  price  of  said  property 
shall  be  determined  by  appraisement  as  follows: 

One  appraiser  shall  be  appointed  by  the  City  in  such  manner  as  the  City 
Council  shall  direct;  one  shall  be  appointed  by  the  company  and  a  third  shall  be 
appointed  by  the  two  so  selected.  Either  party  may  appoint  its  appraiser  at  any 
time  after  the  giving  of  the  notice  of  intention  to  take  over  the  telephone  plant 
and  system  of  the  grantee,  and  serve  written  notice  of  such  appointment  upon  the 
other  party,  and  said  other  party  within  thirty  (30)  days  after  service  of  notice 
of  such  appointment  shall  appoint  its  appraiser  and  serve  written  notice  of  such 
appointment  upon  the  other  party;  whereupon  the  two  appraisers  so  appointed 
shall  appoint  a  third  appraiser. 

In  the  event  that  the  party  first  receiving  the  notice  of  the  selection  of  an 
appraiser  by  the  other  party,  shall  refuse  or  fail  to  appoint  an  appraiser  and 
give  notice  thereof  as  above  provided,  or  in  the  event  that  the  two  appraisers 
first  appointed  shall  fail  to  agree  upon  a  third  appraiser  within  thirty  (30)  days 
after  the  giving  of  notice  of  the  appointment  of  the  second  appraiser,  either  party, 
upon  giving  a  written  notice  of  ten  (10)  days  to  the  other  party,  may  apply  to  the 
then  judges  of  the  Appellate  Court  for  the  First  District  of  Illinois,  or  a  majority 
of  the  judges  of  the  said  Appellate  Court,  for  the  appointment  of  an  appraiser, 
and  if  the  appraiser  appointed  by  the  judges  of  the  said  court,  or  by  a  majority 
of  them,  shall  be  the  second  appraiser,  then  the  third  appraiser  shall  be  selected 
by  the  two  appraisers,  or  if  they  fail  to  agree,  by  the  said  judges  of  the  said 
court,  or  a  majority  of  them,  in  the  manner  hereinbefore  provided,  and  any  ap- 
praiser or  appraisers  appointed  by  said  judges,  or  a  majority  of  them,  shall  have 
the  same  powers  and  duties  as  if  regularly  appointed  in  the  manner  as  first  herein- 
above  provided. 

The  appraisers  shall  determine  what  tangible  property,  real  and  personal, 
owned  by  the  said  company  and  used  for  the  purposes  of  this  grant  is  reasonably 
required  for  its  continued  operation,  taking  into  consideration  the  then  condition 
of  the  art,  and  in  determining  the  fair  cash  value  of  said  property  they  shall  not 
take  into  consideration  its  earning  power,  or  the  value  of  the  rights  or  privileges 
hereby  granted,  or  the  value  of  any  license  or  franchise,  but  shall  allow  for  the 


99 

property  the  then  cost  of  duplication,  taking  into  consideration,  the  then  condi- 
tion of  the  art,  less  depreciation.  In  considering  the  cost  of  duplication  of  under- 
ground conduits,  wires,  cables,  electrical  conductors  and  any  other  underground 
construction  located  in  any  street,  alley  or  other  public  way  which  was  or  were 
placed  therein  at  a  time  when  such  street,  alley  or  other  public  way  was  unpaved, 
the  said  appraisers  shall  not  take  into  consideration  the  cost  and  expense  of  re- 
moving or  replacing  any  paving,  or  part  thereof,  in  such  street,  alley  or  other 
public  way.  An  award  in  writing,  signed  by  a  majority  of  the  appraisers,  shall 
be  valid  and  binding  upon  the  parties. 

Within  ninety  (90)  days  after  the  making  of  said  written  award  by  the  said 
appraisers,  or  a  majority  of  them,  the  Chicago  Telephone  Company  shall  cause  to 
be  duly  made,  executed  and  delivered  proper  bills  of  sale  and  deeds  of  the  said 
telephone  plant  and  system  and  tangible  property  covered  by  said  award,  and  the 
City  of  Chicago,  upon  the  delivery  of  said  bills  of  sale  and  deeds,  and  the  delivery 
of,  or  the  transfer  of  control  over,  said  telephone  plant  and  system  and  tangible 
property,  shall  make  payment  in  cash  therefor,  as  hereinbefore  provided. 

If  said  award  shall  not  have  been  made  until  after  the  date  named  in  the 
written  notice  given  by  the  City  of  its  intention  to  take  over  the  telephone  plant 
and  system  of  the  grantee,  or  its  successor  or  successors,  as  hereinbefore  provided,, 
such  delay  on  the  part  of  the  said  appraisers,  or  a  majority  of  them,  in  making 
their  award,  shall  not  affect  the  right  of  the  City  of  Chicago  to  take  over  the 
said  telephone  plant  and  system  and  tangible  property  of  the  Chicago  Telephone 
Company. 

Said  City  of  Chicago  shall  pay  the  expenses  and  charges  of  the  said  ap 
praisers  for  their  services  under  a  contract  which  shall  be  authorized  by  the  City 
Council  and  entered  into  by  each  of  said  appraisers  at  the  time  of  his  appoint- 
ment. Such  contract  shall  not  allow  to  each  of  said  appraisers  more  than  one 
hundred  dollars  per  day  as  compensation  and  shall  bind  them  to  complete  their 
award  within  a  stipulated  time,  or  be  subject  to  a  specified  reduction  per  day  in 
compensation.  Such  contract  shall  also  forbid  any  of  the  said  appraisers  from 
contracting  for  or  accepting  any  other  or  additional  compensation  for  his  or  their 
services  (from  any  person,  firm  or  corporation)  except  that  provided  in  said  con- 
tract. The  other  terms  of  said  contract  shall  be  such  as  may  meet  the  approval  of 
the  City  Council.  Provided,  that  the  City  of  Chicago  may  deduct  from  the  pur- 
chase price  fixed  by  said  award  one-half  of  the  total  amount  paid  as  the  total 
expenses  and  charges  of  said  appraisal. 

The  appraisers  selected  in  the  manner  aforesaid,  or  a  majority  of  them,  shall 
have  and  may  exercise  at  all  times  the  right  to  make  a  complete  examination  of 
the  records,  books  of  account,  vouchers,  bills,  contracts  and  documents  of  said 
company,  for  the  purpose  of  fully  informing  themselves  as  to  the  actual  cost, 
value  and  depreciation  of  the  plant  and  system  of  said  company,  including  all 
appurtenances,  appliances,  equipment,  lands,  leaseholds,  buildings,  stores,  furniture 
and  fixtures  and  other  property. 

Any  vacancy  or  vacancies  occurring  at  any  time  in  said  Board  of  Appraisers 
by  death,  resignation,  disqualification  or  inability  to  act,  may  be  filled  within 
fifteen  days,  by  the  party  or  body  making  the  original  appointment,  and  if  not 
so  filled,  by  the  judges  of  said  court,  or  a  majority  of  them,  upon  the  application 
of  either  party  hereto,  provided  five  days'  previous  notice  in  writing  of  such  appli- 
cation shall  have  been  given  to  the  other  party. 

The  Chicago  Telephone  Company  by  the  filing  of  the  acceptance  hereinbefore 
provided  for  shall  be  understood  as  granting  and  does  hereby  grant  to  the  City  of 
Chicago,  and  the  said  City  of  Chicago  hereby  reserves  to  itself  the  right  to  des- 
ignate any  person,  firm  or  corporation  having  lawful  authority  to  acquire,  own 
and  operate  a  telephone  line  or  lines  or  a  system  in  said  City  of  Chicago  (herein- 
after called  the  "licensee")  who  or  which  shall  have  the  right  to  purchase  the 
plant,  system,  rights  and  property  of  said  Chicago  Telephone  Company  at  the  ex- 
piration of  the  term  of  this  grant,  or  within  thirty  (30)  days  thereafter,  in  the 
same  manner  which  the  City  hereunder  has  the  right  to  purchase  the  same  within 
such  time,  and  any  person,  firm  or  corporation  so  designated  by  said  City  of  Chi- 
cago as  licensee  twelve  or  more  months  prior  to  the  expiration  of  this  grant  shall 
for  all  the  purposes  of  this  section  stand  in  the  position  of  said  City  of  Chicago. 
The  right  of  the  licensee  of  said  City  of  Chicago  to  acquire  said  telephone  plant, 
svstem,  rights  and  property  by  purchase  under  the  provisions  of  this  ordinance 


100 

shall  in  no  way  be  impaired  or  diminished  by  any  lack  of  authority  or  power  on 
the  part  of  the  City  of  Chicago  itself  to  acquire  the  said  telephone  plant,  system, 
rights  and  property  for  municipal  or  other  use  and  operation. 

Nothing  in  this  section,  however,  shall  have  the  effect  or  be  construed  to 
have  the  effect  of  lessening  or  limiting  the  right  of  the  City  of  Chicago  to  alter, 
change  or  reduce  the  charges,  rates,  tolls  or  other  compensation  to  be  charged  by 
said  licensee  in  the  operation  of  said  plant  and  system,  or  of  lessening  or  limiting 
any  of  the  authority,  power  or  rights  reserved  by  said  City  of  Chicago  to  itself 
by  this  ordinance,  or  of  changing,  lessening  or  limiting  any  of  the  duties,  obliga- 
tions or  restrictions  imposed  by  this  ordinance  upon  the  grantee. 

Nothing  in  this  ordinance  shall  have  the  effect  or  be  construed  to  have  the 
effect  of  extending,  so  far  as  the  licensee  is  concerned,  the  term  of  this  grant 
beyond  January  7,  1929.  Upon  the  purchase  of  said  plant,  system,  rights  and 
property  under  the  provisions  of  this  section  either  by  the  City  of  Chicago,  or  by 
any  licensee  of  said  City,  all  the  rights  of  said  Chicago  Telephone  Company,  its 
licensee  or  assigns,  in  or  to  said  plant,  system,  rights  and  property,  or  any  part  or 
parts  thereof,  or  the  operation  thereof,  or  receipts  therefrom,  shall  wholly  cease 
and  determine.  If  at  the  expiration  of  this  grant  the  City  shall  not  have  elected 
to  purchase  the  plant,  system  and  other  property  of  said  company  hereinbefore 
mentioned,  and  shall  not  have  designated  any  licensee,  the  failure  on  the  part  of" 
the  City  to  purchase,  or  elect  to  purchase,  or  elect  to  designate  a  licensee,  shall 
not  be  construed  as  an  extension  of  this  grant,  or  any  of  the  rights  and  privileges 
hereby  granted. 

The  authority,  powers,  privileges  and  rights  by  this  section  reserved  by  and 
granted  to  the  City  of  Chicago  to  itself  purchase  the  plant,  system  and  property 
of  said  Chicago  Telephone  Company  are  so  reserved  and  granted  upon  the  under- 
standing that  they  and  each  of  them  may  be  exercised  only  if  at  the  time  said 
City  of  Chicago  seeks  to  exercise  the  same,  or  any  of  them,  it  shall  possess  the 
charter  power  so  to  do.  But  said  Chicago  Telephone  Company  by  the  acceptance 
of  this  ordinance  shall  be  understood  as  precluded  from  in  any  manner  attacking 
or  questioning  the  power  of  the  City  of  Chicago  to  exercise  the  authority,  powers, 
privileges  and  rights  hereby  reserved  or  granted,  or  any  of  them. 

A  STATEMENT  PREPARED  BY  PROF.  EDWARD  W.  BEM3S  ON  TELEPHONE 

RATES. 

City  Hall,  Chicago,  May  12,  1913. 
To  the  Committee  on  Gas,  Oil  and  Electric  Light  of  the  City  Council  of  the  City 

of  Chicago,  Honorable  Lewis  D.  Sitts,  Chairman: 

Gentlemen — In  presenting  this  report,  at  the  request  of  the  Committee  on 
Gas,  Oil  and  Electric  Light,  it  is  proposed  to  explain  why  a  reduction  of  $700,000 
in  the  profits  of  the  Chicago  Telephone  Company  was  found  to  be  just  and  reason- 
able and  how  this  amount  has  been  apportioned  between  increases  in  wages,  pen- 
sions and  other  benefits  to  the  employes  of  the  Company,  and  reductions  in  tele- 
phone rates. 

Attention  should  be  called  to  the  fact  that  the  City  of  Chicago  has  made  a 
more  extensive  investigation  of  telephone  rates  than  has  ever  been  made  before 
in  this  country. 

The  ordinance  of  1907,  which  expires  January  8,  1929,  provides  that,  at  the 
end  of  thirty  months,  or,  in  other  words,  in  May,  1910,  the  City  Council  had  the 
right  to  fix  reasonable  telephone  rates  and  charges  for  the  ensuing  five  years,  and 
every  five  years  thereafter,  until  the  expiration  of  the  ordinance.  These  reason- 
able rates  the  Company  pledged  itself  to  accept,  and  if  the  Company  should  deny 
the  reasonableness  of  such  rates,  and  the  courts  should  subsequently  deny  the 
contention  of  the  Company,  all  collection  of  rates  in  excess  of  those  fixed  by  this 
ordinance  must  be  returned  to  the  telephone  subscribers  with  interest  at  5  per  cent. 

In  accordance  with  this  ordinance,  the  Council  Committee  on  Gas,  Oil  and 
Electric  Light  received  a  report,  in  May,  1910,  from  Messrs.  D.  C.  and  W.  B.  Jack- 
son and  Messrs.  Young  &  Co.,  accountants,  which  maintained  that  if  the  Company 
adequately  took  care  of  depreciation,  it  would  come  $908,000  short  of  earning  a 
reasonable  return.  This  return  was  fixed  at  5  per  cent,  on  the  then  outstanding 
bonds  of  $5,000,000,  and  8  per  cent,  on  the  outstanding  stock  of  $27,000,000,  for 
city  and  suburban  divisions,  or  an  average  of  7.74  per  cent,  on  the  entire  capital. 


101 


For  various  reasons,  the  committee  deemed  it  advisable  to  have  another  investiga- 
tion, and  engaged  Mr.  William  J.  Hagenah,  then  a  statistician  for  the  Wisconsin 
Railroad  Commission,  to  make  further  studies.  His  preliminary  report,  received 
by  the  committee  in  December,  1910,  and  considered  by  them  soon  afterwards,  was 
followed  by  a  supplementary  report  in  May,  1911.  The  recommendations  con- 
tained therein  were  in  favor  of  a  reduction  of  approximately  $200,000  a  year. 
Owing  to  a  complication  growing  out  of  a  report  on  gas  rates,  presented  at  about 
the  same  time  by  Mr.  Hagenah,  his  final  telephone  report  was  never  considered 
by  the  Council  committee. 

On  July  17,  1911,  the  writer  was  requested  by  the  Committee  on  Gas,  Oil  and 
Electric  Light  to  make  further  studies.  In  order  to  derive  some  advantage  from 
the  costly  appraisal  made  for  the  Company  by  Messrs.  H.  M.  Byllesby  &  Co.  and 
the  Arnold  Company,  working  together,  during  the  year  preceding  August,  1912, 
my  report  was  not  presented  to  the  committee  until  October  25,  1912.  The  report 
was  the  basis  of  almost  daily  consideration  by  the  committee  until  its  conclusions 
were  adopted  on  January  6,  1913. 

On  the  basis  of  the  most  thorough  accounting  investigation  ever  made  for 
the  public  with  respect  to  any  telephone  company  in  the  United  States,  and  after 
consideration  of  the  appraisal  above  mentioned,  as  well  as  all  other  available  data, 
the  conclusion  was  reached  that  the  Chicago  Telephone  Company  had  a  surplus 
of  $700,000  a  year  over  and  above  a  reasonable  return,  with  which  to  meet  extraor- 
dinary expenses  and  to  reduce  telephone  charges.  This  was  on  the  basis  of  a  study 
of  the  entire  history  of  the  Company,  but  more  particularly  of  its  operations  dur- 
ing 1908,  1909,  1910  and  1911,  under  the  present  ordinance.  The  results  of  1811, 
as  the  latest  year  available,  were  considered  especially  important. 

The  Present  Value  of  the  Property. 

The  entire  cost  of  the  property  now  in  use,  including  working  capital,  so  far, 
at  least,  as  it  has  been  charged  to  construction  or  capital  account  on  the  books, 
is  only  $28,580,494.73.  If  the  property  cost  any  more  than  that  it  was  paid  for 
by  the  telephone  users  and  charged  into  operating  expenses,  while  the  Company 
continued  to  pay  large  dividends,  as  will  later  be  shown. 

The  Byllesby  and  Arnold  Companies  unite  in  declaring  that  to  reproduce  the 
plant  within  the  city  during  the  next  five  years  would  cost  $34,890,530.  To  this 
thev  would  add  $4,753,993  as  the  cost  of  developing  the  business,  or  a  total  of 
$39',664,523. 

The  cost  of  developing  the  business  should  not  be  regarded  in  the  rate  regu- 
lation case  before  us,  because  any  costs  on  this  account,  ever  since  the  beginning 
of  the  Company  in  1881,  have  been  properly  charged  into  operating  expenses.  To 
capitalize  them  now  as  a  species  of  going  value  would  be  like  capitalizing  the 
wages  of  the  switchboard  operators,  or  any  other  operating  expense. 

The  following  comparison  is  made  between  the  cost  of  the  property  within 
the  city,  as  shown  by  the  books  on  August  1,  1911,  and  the  appraisal  by  Byllesby 
and  Arnold  of  the  same  property  new  on  the  same  date: 


Comparison  of  Recorded  Costs  with  Appraisal  New. 

Description. 


%  of  Excess 

Appraisal,  of  Appraisal 

New,  by  Over  Record- 

Byllesby  &  Arnold.         ed  Costs. 
$   1,173,936.98  122.8% 


Cost  as  Per 
the  Books  of 
the  Company. 

Land    $      526,956.61 

Poles  and  pole  lines,  underground 

conduits  and  cables 10,195,623.25  13,589,092.00 

Rest  of  plant,  including  supplies, 
tools,  vehicles,  office  furni- 
ture, etc 17,857,914.87  18,675,615.02  4.58% 

Cash   887,250.00* 

Cost  of  plant  development 564,636.00 

Total  of  above  items $28,580,494.73  $34,890,530.00  27.08% 

Cost  of  developing  tire  business 4,753,993.00 

Grand   total    $28,580,494.73  $39,644,523.00  38.69% 

*Estimated  amount  needed. 


102 

Practically  all  of  the  excess  in  the  appraisal,  above  the  cost  recorded  in  the 
books  of  the  Company,  is  confined  to  land,  poles  and  pole  lines,  underground  con- 
struction, cash  and  cost  of  plant  development,  and  allowance  for  going  value  under 
the  guise  of  cost  developing  the  business.  The  land,  which  has  been  owned  by 
the  Company  for  many  years,  may  easily  have  increased  in  value  by  the  amount 
indicated.  There  is  much  doubt  whether  this  increase  of  value  should  be  capital- 
ized, or  taken  into  account  in  fixing  rates.  It  has  been  conceded  to  the  Company  in 
this  present  instance. 

The  present  prices  for  copper  and  the  congestion  in  the  streets,  which  would 
increase  the  cost  of  underground  construction,  new,  as  compared  with  the  time 
when  it  was  originally  made,  will  hardly  account  for  the  difference  between  the 
recorded  cost  and  the  appraisal.  The  cash  that  has  been  estimated  in  the  ap- 
praisal as  necessary  has  been  reduced  in  my  computations  by  $168,989.  There  is 
still  left  an  amount  equal  to  two  months'  payroll.  This  appears  ample  in  view  of 
the  fact  that  the  Company  is  allowed  the  full  value  of  its  supplies,  although  it 
buys  them  on  about  thirty  days'  credit,  and  in  view  of  the  further  fact  that  col- 
lections are  made  monthly,  and  to  some  extent,  on  the  flat  rate  service,  even  in 
advance. 

In  the  appraisal  of  Byllesby  and  Arnold,  an  allowance  was  made  of  $512,236 
as  the  estimated  cost  of  cutting  through  the  paving  today  and  restoring  the  same 
in  streets  where  no  paving  existed  when  the  conduits  were  laid,  but  where  the  City 
has  subsequently  laid  the  same.  While  this  item  is  logically  included  in  a  strict 
theory  of  depreciation,  the  courts  have  not  thus  far  required  a  rate  regulating 
body  to  depart  from  the  common  sense  principle  of  ignoring  such  items  of  cost 
of  reproduction  as  were  not  met  with  in  the  original  construction,  and  were  never, 
therefore,  a  burden  on  the  investor,  although  they  might  be  a  burden  if  the  incon- 
ceivable situation  should  occur  of  a  sudden  destruction  by  earthquake  of  all  the 
underground  construction  without  disturbing  the  paving,  so  that  the  property 
must  be  entirely  relaid  through  the  existing  paving.  Where  the  appraisal  covers 
only  the  estimated  cost  of  cutting  through  the  paving  that  was  in  existence  when 
the  conduits  were  laid,  the  appraisal  has  been  used,  as  the  only  basis  readily  avail- 
able for  use  in  the  present  investigation. 

About  20  per  cent,  was  allowed  by  Byllesby  and  Arnold  for  overhead  charges, 
aside  from  the  so-called  cost  of  plant  development.  Only  15  per  cent,  is  here 
conceded.  It  may  be  that  if  the  reconstruction  theory  is  the  only  one  considered, 
the  overhead  might  somewhat  exceed  the  15  per  cent,  conceded  in  Chicago,  but 
since  the  total  cost  of  the  property  as  recorded  on  the  books  of  the  Company  and 
paid  for  by  the  investors  was  no  greater  than  the  Byllesby  and  Arnold  appraisal, 
aside,  entirely,  from  their  overhead  charges,  it  would  appear  that  an  allowance  of 
15  per  cent,  is  a  sufficient  concession  to  the  reproduction  theory.  This  reduction 
of  overhead  to  15  per  cent,  means  a  reduction  in  the  appraisal  of  $1,246,735.97. 
The  following  table  will  summarize  the  result: 

Appraisal  of  Messrs.  Byllesby  &  Arnold  Less  Certain 
Excluded  Items. 

Appraisal,  new,  by  Byllesby  &  Arnold $39,644,523 

Deductions — 

(1)  On  paving $    512,236 

(2)  On  overhead   1,246,736 

(3)  On  cost  of  plant  development 564,636 

(4)  On  cost  of  developing  the  business 4,753,993 

(5)  On  cash   168,989 


Total  deductions    $  7,246,590 


Appraisal  with  above  deductions $32,397,933 

Cost  as  per  books 28,580,495 

In  taking  $32,397,935  as  a  reasonable  present  value  new,  of  the  property, 
about  $7,250,000  less  than  the  appraisal  and  $3,800,000  more  than  the  cost  recorded 
on  the  books  of  the  Company,  the  writer  has  taken  somewhat  of  a  middle  ground 


103 

between  the  reproduction  theory  and  the  cost  theory.  In  the  absence  of  any  direct 
appraisal  by  the  City,  or  a  joint  appraisal  by  the  Company  in  which  the  City  was 
represented,  and  in  the  face  of  the  present  doubt  as  to  the  attitude  of  the  courts 
on  the  importance  of  the  cost  of  the  property  in  rate  cases,  the  above  position  may 
be  taken  as  conservative.  The  actual  cost  of  the  property  will  be  increasingly 
considered  by  the  courts,  in  all  probability,  as  more  important  in  such  rate  case's 
than  the  estimates  of  engineers. 

Present  Value. 

Messrs.  Byllesby  and  Arnold  reported  to  the  Chicago  Teelphone  Company,  in 
their  nine-volume  report,  not  only  their  estimate  of  the  duplication  cost  of  all 
parts  of  the  property,  but  also  their  estimate  of  its  present  value  after  allowing 
for  such  depreciation  as  the  Company  has  experienced  in  the  business,  from  wear 
and  tear,  obsolescence,  inadequacy,  etc.  Their  estimate,  including  their  allowance 
for  the  cost  of  developing  the  plant,  properly  depreciated,  was  $27,764,134,  or  not 
quite  80  per  cent,  of  their  estimate  of  the  property  new.  Applying  substantially 
the  same  percentage  of  depreciation  to  the  lower  value,  $32,397,933,  conceded  by 
the  writer  as  a  very  conservative  and  probably  too  high  estimate,  the  present 
value  Avould  be  $25,754,705.  This  is  $2,825,790, 'or  about  10  per  cent,  below  the 
recorded  cost  of  the  property. 

Of  the  entire  property  in  the  city  and  suburbs,  whose  cost  according  to  the 
books  was  $36,485,841  on  August  1,"  1911,  about  '$16,000,000  or  nearly  half, 
was  added  during  the  four  years,  1908,  1909,  1910  and  1911,  although  approxi- 
mately $6,000,000  of  the  $16,000,000  represented  replacements  and  renewals  rather 
than  actual  construction.  Were  the  depreciation  of  about  20  per  cent,  to  be  ap- 
plied to  the  cost  of  the  property  as  it  appears  upon  the  books  of  the  Company, 
the  value  for  rate-making  purposes,  on  August  1,  1911,  would  have  been  reduced  to 
about  $23,000,000.  Such  a  further  reduction,  however,  might  have  increased  the 
proper  allowance  to  be  made  for  depreciation  in  the  operating  expenses,  and  any 
way  could  hardly  have  been  taken  without  resolving  more  doubts  in  favor  of  the 
City  than  the  data  at  hand  appeared  to  warrant.  At  future  rate-making  periods, 
five  and  ten  years  hence,  the  City  should  not  feel  precluded  by  anything  in  this 
report  from  further  challenge  of  the  value  of  the  property  on  August  1,  1911. 

Operating  Expenses. 

The  total  operating  expenses  in  1911  within  the  city  were  $7,584.289.80.  This 
was  reduced  to  $7,496,598.62  by  throwing  back  into  previous  years  a  portion  of 
the  extraordinary  expenses  incurred  in  1911  on  account  of  the  appraisal  and  labor 
difficulties. 

Two  important  controversies  arose  with  the  Company  at  this  point.  One 
related  to  the  inclusion  in  operating  expenses  of  a  rental  of  41/o  per  cent,  on  the 
gross  receipts  to  the  American  Telephone  and  Telegraph  Company,  which  owns 
about  95  per  cent,  of  the  stock  of  the  local  Company.  The  other  relates  to  the 
proper  allowance  for  depreciation. 

Rental  to  American  Telephone  and  Telegraph  Company. 

All  the  Bell  Telephone  Companies  of  the  United  States  are  controlled  by  the 
American  Telephone  and  Telegraph  Company,  through  the  ownership  of  the  major- 
ity of  the  stock,  and  pay  to  it  yearly  a  rental  of  4V»  per  cent,  of  their  gross  re- 
ceipts. In  the  case  of  the  Chicago  Telephone  Company,  within  the  city,  it  amounts 
to  about  $1.75  per  telephone  per  year,  and,  by  a  singular  coincidence  of  no  im- 
portance here,  it  amounts  to  about  1.75  per  cent,  of  the  present  value  of  the  prop- 
erty. This  payment  purports  to  cover  three  benefits  from  the  parent  company: 
(1)  A  portion  of  the  equipment  of  the  telephone  itself,  known  as  the  "receiver, 
transmitter  and  induction  coil,"  which  is  furnished  and  kept  in  repair  by  the 
American  Telephone  and  Telegraph  Company^.  (2)  Certain  patents,  of  which  only 
one,  the  Pupin  coil,  is  of  any  importance  in*  this  connection,  and  (3)  some  legal, 
engineering  and  accounting  services  from  the  parent  company.  These  will  be  taken 
up  in  order. 


104 

The  request  of  the  writer  that  he  might  examine  the  books  and  accounts  of 
the  Western  Electric  Company,  owned,  like  the  Chicago  Telephone  Company,  by 
the  American  Telephone  and  Telegraph  Company,  showing  the  cost  of  construc- 
tion and  maintenance  of  the  receiver,  transmitter  and  induction  coil,  was  denied. 
The  following  facts,  however,  were  not  denied: 

a.  The  Chicago  Telephone  Company  charged  the  City  of  Chicago  only  50  cents 
rental  for  these  instruments,  when  making  competitive  bids  with  independent  com- 
panies for  their  supply  in   1907   (or   1906).     There  was  actually   supplied  to  the 
City,  under  the  contract  then  made,  1,557  sets,  and  this  rate  would  doubtless  have 
continued  had  not  the  ordinance  of  November  6,  1907,  given  to  the  City,  in  return 
for  the  franchise,  the  right  to  use  the  receiver  and  transmitter  free. 

b.  These  instruments  have  been  lately  offered  on  the  market  by  the  Western 
Electric  Company,  a  branch  of  the  American  Telephone  and  Telegraph  Company, 
for  $2.57,  and  equally  good  apparatus  has  been  offered  by  independent  companies 
for  $2.80.     It  is  likely  that  where  these  articles  are  supplied   in   such   enormous 
quantities  as  in  Chicago,  a  price  of  $2.25  could  be  secured  from  independent  com- 
panies.   Interest,  maintenance  and  depreciation  on  such  costs  would  surely  not  ex- 
ceed 25  per  cent.,  or  from  50  cents  to  60  cents  a  year. 

c.  The  Wisconsin   Railroad  Commission,  on   April  21,   1911    (6  W.   R.   C.   R., 
page  508,  98-9),  when  discussing  this  item  in  a  case  before  the  Commission,  held 
that  51  cents,  "with  a  few  cents  added  for  repairs,  comes  very  close  to  repre- 
senting the  normal  annual  charge  for  this  part  of  the  equipment. ' ' 

As  for  patents,  the  only  one  of  importance  that  is  not  sold  with  the  goods  in 
which  the  patent  is  embodied,  to  all  companies,  whether  Bell  or  independent,  is 
the  Pupin  coil.  This,  in  a  large  city  like  Chicago,  saves  the  investment  of  a  large 
amount  of  copper,  by  so  boosting  the  current,  as  it  were,  as  to  permit  small  wires 
to  transmit  a  message  that  otherwise  would  require  larger  wires.  On  the  other 
hand,  no  denial  was  made  by  the  Company  that  the  cost  of  this  patent  for  the 
entire  United  States,  together  with  all  the  royalties  thereon,  could  be  paid  for 
during  the  life  of  the  patent  by  a  charge  of  less  than  2  cents  a  year  per  telephone. 

There  was  no  evidence  that  the  parent  company  spends  upon  the  local  com- 
pany for  engineering,  accounting,  legal  and  other  such  services  more  than  10  cents 
per  telephone  per  year,  while  the  Chicago  Company,  by  its  experimental  trial  of 
inventions  and  new  processes,  renders  some  service  to  the  American  Telephone  and 
Telegraph  Company. 

In  view  of  the  above,  it  would  certainly  seem  liberal  to  allow  75  cents  per 
telephone  per  year,  instead  of  $1.75  in  Chicago  as  a  rental.  However,  in  order 
to  err  on  the  safe  side,  in  attacking  a  rental  that  is  universal  in  Bell  companies 
throughout  the  country,  $1  per  telephone  was  conceded  as  rental,  and  the  other  75 
cents  was  rejected.  This  is  equivalent  to  asserting  that  if  the  local  Company  con- 
tinues to  pay  this  rental,  it  is  merely  transferring  from  one  pocket — that  of  the 
Chicago  Telephone  Company  to  another — that  of  the  American  Telephone  and 
Telegraph  Company,  a  profit  of  %  per  cent.,  and  this  should  be  considered  in  lieu 
of  a  dividend  or  profit  of  that  amount  on  the  investment. 

Maintenance. 

The  Chicago  Telephone  Company  attempts  to  keep  up  the  value  of  the  property 
in  four  ways,  by  repairs,  directly  charged;  by  incidental  repairs  at  the  time  of 
removing  or  changing  a  subscriber's  telephone,;  by  renewals,  and,  finally,  by  in- 
vestment of  a  depreciation  reserve  in  extensions  from  year  to  year,  this  deprecia- 
tion reserve  being  designed  to  cover  such  decline  in  the  value  of  the  property 
as  is  not  met  by  the  three  above  mentioned  charges. 

If  the  plant  were  not  growing  so  rapidly  it  is  possible  that  no  depreciation 
reserve  would  be  necessary,  but  that  the  property,  having  once  reached  a  normal 
state  of  depreciation,  of  perhaps  70  per  cent,  of  its  value  when  new,  would  con- 
tinue in  that  state. 

The  expenditures  within  the  city  for  repairs,  renewals  and  station  removals 
and  changes  during  the  five  years,  1908-1912,  inclusive,  under  the  1907  ordinance, 
have  been  about  10.3  per  cent,  of  the  cost  new  of  that  part  of  the  property  subject 
to  depreciation,  land,  cash  and  a  few  other  items  being  excluded. 

This  figure  of  10.3  per  cent,  is  over  1  per  cent,  higher  than  the  average  expen- 
ditures for  the  above  items  and  for  additions  to  the  depreciation  reserve  of  all 


105 

the  other  Bell  Companies  of  the  United  States  during  the  last  five  yearg.  Yet  it  is 
the  boast  of  President  Vail  of  the  American  Telephone  and  Telegraph  Company,  in 
his  reports  for  1907  and  1912,  that  appraisals  have  shown,  that  these  expenditures 
have  kept  the  companies  in  the  aggregate  from  any  decline  in  value. 

Owing,  however,  to  the  transient  character  of  a  considerable  portion  of  the 
population  of  Chicago,  especially  of  those  using  the  cheaper  telephone  service,  the 
expenditure  for  station  removals  and  changes  is  fully  1  per  cent,  higher  in  Chicago 
than  the  average  elsewhere. 

The  actual  expenditure  in  Chicago  of  10.3  per  cent.,  with  an  addition  to  the 
depreciation  reserve  of  1.7  per  cent.,  or  a  total  of  12  per  cent.,  would  have  amply 
cared  for  any  decline  in  the  value  of  the  property  below  its  cost.  In  view  of  the 
experience  of  the  other  Bell  companies,  even  11  per  cent,  might  be  considered 
reasonable. 

Looked  at  in  another  way,  the  expenditures  for  repairs  and  station  removals 
and  changes  within  the  city  have  averaged  about  7.5  per  cent,  during  the  last  five 
years.  That  4.5  per  cent,  is  sufficient  to  supplement  repairs  and  station  removals 
and  changes,  is  indicated  by  the  conclusions  of  Byllesby  and  Arnold,  that  the  com- 
posite life  of  the  property  is  18.318  years,  the  salvage  22.542  per  cent.,  and  the 
annual  depreciation  allowance  necessary  on  a  straight  line  basis  4.228  per  cent,  of 
the  plant,  and  of  the  land,  exclusive  of  working  capital  construction  in  process, 
tools,  teams,  supplies,  furniture  and  fixtures.  But  4.228  per  cent,  on  the  land  and 
plant  is  about  4.5  per  cent,  on  the  property  subject  to  depreciation. 

There  can  be  little  doubt  that  12  per  cent,  of  the  depreciable  property  ex- 
pended in  repairs,  renewals,  station  removals  and  changes  and  additions  to  the 
depreciation  reserve  is  sufficient  to  keep  the  value  intact,  and  that  if  Chicago 
were  like  the  average  Bell  companies  10  per  cent,  or  less  would  be  enough. 

The  writer  allowed  the  Company  12  per  cent.  The  figures  now  given  are  a 
continuation  of  those  already  brought  out,  where  the  expenses  properly  appor- 
tioned to  1911,  after  deducting  most  if  not  all  of  the  excess  rentals,  was  taken  at 
$7,304,780.62.  The  computation  of  $700,000  of  surplus  follows: 

Corrected  Expenses,  Receipts,  Profits  and  Surplus. 

Add  to  nominal  operating  expenses  of  $7,304,780.62  to  bring  actual 
expenses  of  repairs,  renewals  and  station  removals  and  changes, 
of  $2,452,188.23  up  to  12%  of  average  depreciable  investment 
costing,  as  per  books,  $25,902,447,  said  12%  amounting  to 

$3,108,293.64 .$       656,105.41 

Admitted  operating  expenses  and  adjusted  depreciation 7,960,886.03 

Eeceipts , 10,410,770.59 

Profits .• 2,449,884.56 

Conceded  as  reasonable  profit,  based  on  8%  on  stock  and  5%  on  out- 
standing indebtedness  (in  their  present  proportion)  in  case  excess 
rentals  to  American  Telephone  &  Telegraph  Co.  are  remitted.  .  .  .  6.75% 

6.75%  of  conceded  present  value  above  of  $25,754,705.41 1,738,442.61 

Surplus  in  1911 711,441.95 

Long-Distance  Revenues. 

There  is  much  to  be  said  in  favor  of  the  contention  that  the  American  Tele- 
phone and  Telegraph  Company,  in  keeping  about  90  per  cent,  of  the  $900,000  col- 
lected in  Chicago  from  long  distance  business,  is  keeping  too  large  a  percentage. 
Certainly  on  the  basis  of  contracts  made  by  the  independent  companies  with  their 
long  distance  lines,  Chicago  would  be  entitled  to  $100,000  more  of  the  long  distance 
revenue  than  it  is  permitted  to  retain.  However,  since  the  Chicago  system  of  divi- 
sion of  revenue  between  the  local  and  the  national  company  is  that  common  to  all 
Bell  companies,  and  since  the  difficulties  are  considerable  in  clearly  establishing 
the  injustice  of  the  present  division,  it  has  seemed  best  to  resolve  this  doubt  in 
favor  of  the  Company,  for  the  present.  Tn  future  regulation  of  rates,  this  matter 
may  well  be  searchingly  investigated  by  the  City. 


106 
Fast  Profits  and  Charges. 

In  1881,  the  first  year  of  the  Company's  history,  no  dividends  were  paid.  From 
that  time  until  1908  the  dividends  were  never  less  than  10  per  cent.  They  were 
reduced  to  8  per  cent,  in  1908  and  have  been  of  that  amount  since  then;  but  the 
reduction  from  10  per  cent,  to  8  per  cent,  was  accompanied  by  an  increase  of  stock 
out  of  earnings  from  $22,500,000  to  $27,000,000.  The  actual  dividend,  thus,  on  the 
stock  representing  any  cash  contribution  from  the  stockholders  scarcely  declined 
at  all. 

In  other  words,  the  dividends  now  paid  of  $2,160,000  on  $27,000,000  of  stock 
represents  9.6  per  cent,  on  the  $22,500,000  worth  of  stock  outstanding  at  the  close 
of  1907,  before  the  capitalization  of  surplus  earnings. 

It  is  interesting  to  observe  that  had  the  stockholders  been  content  with  10 
per  cent,  on  their  actual  contributions  from  the  start,  and  had  they  been  further 
content  to  pay  off  the  stock  out  of  earnings  in  excess  of  10  per  cent,  on  their  out- 
standing stock  when  there  were  such  earnings,  the  stock  would  have  all  been  re- 
deemed and  all  the  extensions  would  have  been  paid  for  out  of  earnings  on  Janu- 
ary 1,  1912,  with  the  exception  of  $5,000,000  of  bonded  debt. 

While  some  consideration  should  be  given  in  rate  regulation  to  the  fact  that 
the  profits  of  the  Company  have  been  large,  yet  in  the  face  of  some  competition  in 
Chicago  from  a  rival  company,  it  has  seemed  wise  to  leave  a  return  of  6.75  per 
cent,  upon  the  present  Aralue  of  the  physical  property.  The  percentage  of  profits 
on  the  property  in  use  are  not  as  great  under  the  ordinance  of  1907  as  under  the 
higher  charges  previously  prevailing.  The  following  table  gives  the  average  num- 
ber of  telephones  in  use  and  the  average  charges  during  each  three  year  period  be- 
ginning with  1897: 

Average  Number 
Year.  of  Telephones.  Average  Charge. 

1897 13,515  $121.90 

1900 24,535  98.35 

1903 71,441  57.62 

1906 : 121,186  51.58 

1909 192,976  39.43 

1912   285,578  36.98 

Formerly  the  Company  made  large  profits  from  a  charge  of  $125  per  telephone, 
even  though  every  one  had  unlimited  service,  but  the  service  at  this  charge  was 
only  furnished  within  a  limited  area.  Today  the  Company  is  not  making  even  1 
per  cent,  on  its  13,000  single  party  flat  rate  business  lines  at  $125.  The  chief  rea- 
son appears  to  be  that  whereas  formerly  there  were  only  ten  or  twelve  messages 
per  day  on  these  lines,  there  are  now  over  twenty  messages  per  day.  The  small 
users  have  taken  other  forms  of  service.  Measured  service  reduced  the  average 
number  of  messages  per  telephone  per  day,  in  1912,  to  about  5  6/10. 

The  growth  of  the  two-party  and  four-party  lines  and  extension  telephones 
has  reduced  the  average  investment  per  telephone.  Yet  the  profits  under  the  re- 
duced rates  given  above  would  not  have  been  enough  to  permit  of  further  reduc- 
tions now,  had  it  not  been  for  the  decline  in  messages  per  telephone  as  a  result  of 
measured  service  by  80  per  cent,  of  the  present  subscribers. 

The  Proposed  Ordinance. 

Following  the  acceptance  by  the  Committee  on  Gas,  Oil  and  Electric  Light, 
on  January  6th,  of  the  writer's  recommendation  for  a  reduction  of  $700,000  in  the 
revenues  of  the  Chicago  Telephone  Company  of  $700,000  yearly,  a  report  was  pre- 
sented by  me,  at  the  request  of  the  committee,  on  January  30th,  apportioning  this 
$700,000  between  increases  in  wages  and  pensions  of  the  employes  and  reduction 
in  rates.  After  extended  discussions  the  committee,  on  May  8th,  reached  the  con- 
clusions embodied  in  the  ordinance  here  presented: 

In  the  ordinance  recommended  into  the  City  Council  on  May  12,  by  the  Com- 
mitee  on  Gas,  Oil  and  Electric  Light,  the  Company  must  make  reductions  in  rates, 
to  be  presently  described,  such  as  will  mean  a  reduction  the  first  year  of  over 


107 

$400,000  to  the  100,000  subscribers  now  paying  the  highest  rates  per  message, 
and  will  render  possible  a  reduction  of  over  $500,000  a  year,  if  all  who  can  take 
advantage  of  the  new  rates  choose  to  do  so.  With  the  rapid  growth  of  the  classes 
of  telephone  service  benefited  by  this  ordinance  the  reduction  as  compared  with 
the  present  rates  will  proportionately  increase. 

Furthermore,  the  Company  is  required  to  pay,  during  each  of  the  next  five 
years,  fully  $320,000  more  than  was  paid  in  1912  to  the  same  employes  and  posi- 
tions engaged  within  the  city  limits  in  the  operating  as  distinct  from  the  construc- 
tion departments.  This  increase  must  all  go  to  those  employes  receiving  less  than 
$200  a  month.  The  Company  must  also  pay  yearly  to  its  employes  within  the  city, 
or,  in  case  of  death,  to  their  beneficiaries,  at  least  $100,000  in  pensions,  and  in  sick, 
disability  and  death  benefits. 

Reductions  in  Rates  and  Charges. 

Aside  from  several  minor  reductions,  aggregating  about  $50,000,  there  are 
three  large  reductions  in  the  proposed  ordinance,  all  in  the  interests  of  the  com- 
paratively small  business  or  residence  user,  who,  because  of  his  small  use  and  large 
guarantee,  is  now  paying  5  cents  and  upward  per  message. 

These  three  large  reductions  come  about  through  the  installation  of  a  single 
line  measured  service  for  business  uses,  with  the  privilege  of  960  messages  for  $48 
a  year,  a  single  party  measured  residence  line  with  the  privilege  of  800  messages, 
and  a  reduction  of  all  excess  messages  above  the  guarantee  from  5  cents  to  4  cents 
on  one-party  and  two-party  business  nickel  phones,  and  two-party  and  four-party 
residence  nickel  phones.  Some  details  of  these  rates  may  be  referred  to  here. 

I.  Reductions  through  a  $48  one-party  line,  960  messages,  with  5  cents  each 
for  the  next  240  messages  and  3  cents  each  for  the  next  1,200  messages.  Section  2 
(a)  of  proposed  ordinance. 

1.  Effect  on  the  present  $60  1,200  message  single  line. 

Of  the  11,623  subscribers  of  this  class,  December  31,  1912,  where  $60  is  now 
paid  and  1,200  messages  are  allowed,  3,700  subscribers  send  less  than  960  messages 
yearly,  and  under  the  new  rates  would  pay  $48  instead  of  $60,  a  saving  of  $12  for 
each  subscriber,  or  $44,400  for  the  entire  number  of  subscribers.  Another  1,450 
subscribers  average  only  1,080  messages,  and  would  pay,  therefor,  only  $54  instead 
of  $60,  a  saving  of  $6  each,  or  $8,700  in  the  aggregate.  The  5,150  subscribers  in 
this  class  who  are  paying  5  cents  and  upward  per  message  will  thus  save  $53,100 
by  the  new  rates.  They  are  mostly  the  smaller  users.  This  may  be  tabulated  as 
follows: 

Number  Number  of 

or  Present  Messages  Present             New  Saving  Per  Aggregate 

Subscribers.  Yearly.         Rate.  Average  Rate.  Subscriber.  Saving. 

3,700  960  '  $60.00              $48.00                   $12.00  $44,400.00 

1,450  1,080                 60.00                 54.00                       6.00  8,700.00 

5,150  $53,100.00 

2.  Effect  of  flat  rate  business  lines,  one-party.     Section  2  (c). 

Of  the  12,520  subscribers  of  this  class  paying  $125  a  year,  500  send  under  960 
messages,  and  all  these  could  reduce  their  bill  to  $48,  a  saving  of  $77  each,  or  an 
aggregate  saving  of  $38,500.  The  1,500  subscribers  who  average  only  2,200  mes- 
sages could  obtain  them  under  the  new  rate  for  $90,  a  saving  of  $35  each,  or 
$52,500  in  the  aggregate.  Thus,  the  2,000  smallest  users  in  this  class,  who  are 
now  paying  from  5  cents  to  15  cents  per  message,  can  save  $91,000  by  the  new  rates. 

A  portion  of  this  saving  could  have  been  gained,  indeed,  under  the  present 
ordinance,  but  through  the  failure  of  the  Company  to  publish  the  rates  in  the 
directory  or  otherwise,  few  knew  of  the  opportunity  this  afforded.  This  opportu- 
nity is  now  greatly  enlarged  and  is  coupled  with  the  provision  in  Section  2.  para- 
graph (1)  of  the  new  ordinance,  that  all  these  rates  shall  be  published  in  every 
issue  of  the  Chicago  Telephone  Directory,  and  embodied  in  a  folder  to  be  had  on 
application  at  the  offices  of  the  Chicago  Telephone  Company. 

The  above  data  may  be  tabulated  as  follows: 


108 


Number 

or  Present 

Subscribers. 

500 
1,500 


Number  of 

Messages  Present             New  Saving  Per 

Yearly.  Eate.  Average  Kate.  Subscriber. 

960  "  $125.00              $48.00                   $77.00 

2,200  125.00                 90.00                     35.00 


Aggregate 
Saving. 

$38,500.00 
52,500.00 

$91,000.00 


2,000 

3.    Nickel  business  telephone,  one-party. 

A  subscriber  to  this  class  of  service  must  guarantee  20  cents  a  day,  or  $73  a 
year,  for  which  he  can  send  out  1,460  messages,  but  1,050  out  of  the  3,004  sub- 
scribers are  now  using  under  960  messages  a  year,  which,  under  the  new  rate,  they 
could  have  without  the  bother  of  a  coin  box  for  each  subscriber.  This  means  a 
saving  of  $25  for  each  subscriber  ($73,  less  $48),  or  an  aggregate  saving  of  $26,250. 
This  one  reduction,  here  grouped  as  Class  I,  from  $60  to  $48,  with  the  right  to  960 
messages,  will  render  it  possible  for  8,200  small  business  users  to  save  $170,350. 

n.  Reductions  through  a  $40  one-party  residence  line,  800  messages,  with  4 
cents  each  for  the  next  400  messages. 

1.  Effect  on  the  present  single-party  flat  rate  $72  residence  line.     Section  2 
(b)   of  proposed  ordinance. 

Number  Number  of 

or  Present  Messages  Present  New  Saving  Per  Aggregate 

Subscribers.  Yearlv.  Eate.       Average  Eate.    Subscriber.  Saving. 

850                Under  800  "  $72.00  $40.00                  $32.00  $27,200.00 

650  900  72.00  44.00                     28.00  18,200.00 

300  1,100  72.00  52.00                    20.00  6,000.00 

450    -  1,467  72.00  64.00                        8.00  3,600.00 

2,250  $55,000.00 

The  total  number  of  subscribers  in  this  class,  December  31,  1912,  was  5,777. 

2.  Effect  on  the  present  two-party  flat  rates,  for  which  $56  a  year  is  charged. 
Section  2  (b)  of  proposed  ordinance. 

Number  Number  of 

or  Present  Messages  Present 

Subscribers.  Yearly.  Eate. 

1,450  Under  800  $56.00 

700  1,000                56.00 


New  Saving  Per  Aggregate 

Average  Eate.  Subscriber.  Saving. 

$40.00                   $16.00  $23,200.00 

48.00                       8.00  5,600.00 

21,50  $28,800.00 

The  total  number  of  subscribers  in  this  class,  December  31,  1912,  was  5,862. 

3.  Effect  on  present  two-party  residence  nickel  line  for  which  lOc  a  day  is 
paid,  or  $36.50  a  year,  with  an  allowance  of  730  messages  and  5c  for  additional 
messages.  Section  2  (b)  of  ordinance. 

Number  Number  of 

or  Present  Messages  Present             New  Saving  Per  Aggregate 

Subscribers.  Yearly.         Eate.  Average  Eate.  Subscriber.  Saving. 

1,100  950  $47.50              $46.00                        $1.50  $1,650.00 

Total  number  of  subscribers  in  this  class  December  31,  1912,  was  3,077.  Thus 
in  Class  II,  5,500  present  subscribers  can  save  $85,450. 

III.  Reductions  through  4  cents  instead  of  5  cents  for  all  excess  messages  in 
nickel-first  classes.  Section  2  (d)  of  ordinance. 

1.  One-party  business  nickel  line,  where  20e  a  day,  entitling  to  4  messages 
is  guaranteed. 

Number  Number  of  Yearly 

or  Present  Messages  Present             New  Saving  Per  Aggregate 

Subscribers.  Yearly.  Eate.  Average  Eate.  Subscriber.  Saving. 

1,950  2,715  $135.75              $123.20  $12.55  $24,500.00 

Total  number  of  subscribers  to  this  class  December  31,  1912,  was  3,004. 


109 

2.  Two-party  business  nickel  line,  with  guarantee  of  12%c  a  day,  entitling  to 
2^2  messages. 

Out  of  23.007  of  this  class,  10,400  pay  excess  charges  of  $250,000.  Tf  they 
were  all  nickel-first  subscribers,  the  saving  under  the  new  ordinance  would  be  20 
per  cent.,-  or  $50,000.  It  is  estimated  that  90  per  cent,  or  9,350  subscribers  would 
soon  become  nickel-first  users,  where  they  do  not  already  have  that  type  of  tele- 
phone, and  would  save  $45,500.  Over  half  of  this  class  of  users  have  the  nickel- 
first  phones  now. 

3.  Two-party  residence  nickel  line,  (with  guarantee  of  lOc  daily. 
Number  Number  of 

of  Present  Messages       Present  New  Saving  Per  Aggregate 

Subscribers.  Yearly.         Rate.       Average  Rate.    Subscriber.  Saving. 

300  1,013  "  $50.65  $47.82  $2.83  $850.00 

Total  number  of  subscribers  in  this  class  December  31,  1912,  was  3,077. 

4.  Four-party  nickel  residence  line,  with  guarantee  of  5  cents  a  day,  entitling 
to  one  message. 

Of  the  136,609  subscribers  to  this  class  of  service,  both  nickel-first  and  nickel- 
last,  on  December  31,  1912,  about  77,000  were  paying  $617,000  a  year  for  messages 
in  excess  of  the  guaranteed  number.  This  is  over  and  above  deficits  which  were 
later  recovered  through  excess  message  charges.  If  the  entire  77,000  having  excess 
messages  should  take  nickel-first  telephones,  under  the  new  ordinance,  they  would 
save  20  per  cent  of  the  excess  charge,  or  $123,400.  It  is  believed  that  fully  70.000 
subscribers,  sending  80  per  cent,  of  the  excess  messages,  will  soon  have  nickel-first 
telephones,  and  thus  save  $99,000  a  year.  There  are  now  50,000  subscribers  having 
nickel-first  telephones. 

In  the  above  various  classes  of  nickel  telephone  users,  99,150  subscribers 
would  save  $169,850. 

IV.  Reduction  from  3  cents  to  2Va  cents  on  the  third  1,200  messages,  in  meas- 
ured service,  both,  business  and  residence,  i.  e.,  in  Classes  I  and  II.    Section  2  (a) 
of  proposed  ordinance. 

Of  the  11,623  subscribers  to  this  class,  4,150  are  now  sending  4,175,000  mes- 
sages a  year,  and  who  would  be  affected  by  this  reduction  of  ^  cent.  Their  gain 
would  amount  to  $20,900. 

V.  Reduction  in  toll  rate  from  10  cents  to  5  cents,  between  adjacent  com- 
munities just  inside  and  just  outside  the  city  limits,  as  provided  in  Section  2  (i) 
of  the  proposed  ordinance. 

This  will  save  $10,000  to  5,000  subscribers. 

VI.  Telephone  bureau.    Section  4  of  the  proposed  ordinance. 

It  is  provided  that  the  telephone  company  shall  contribute  to  the  cost  of  the 
telephone  bureau,  a  sum  not  to  excess  i/2  mill  on  the  gross  receipt*.  This  will  mean 
an  average  expense  during  the  next  five  years,  to  be  borne  by  the  Company,  of 
about  $8,000  a  year,  and  will  mean  during  the  first  year  of  the  period  $6,750. 

VII.  Minor  reductions. 

1.  Reduction  of  transfer  charge,  from  $5  to  $1,  where  a  subscriber  moves  to 
a  new  location  where  there  is  a  telephone  and  line  which  can   be  used   without 
change.    Section  2  (n)  1  of  proposed  ordinance. 

This  will  yearly  reduce  the  charges  $6,800  to  1,700  subscribers. 

2.  Where  a  telephone  service  is  discontinued  for  unpaid  bills  or  otherwise,  it 
will  be  reinstated  for  $2  instead  of  $2.50.     Section  2  (o)of  proposed  ordinance. 

This  reduction  means  $800  to  1,600  subscribers.  The  charge  is  not  imposed 
for  revenue  purpose,  but  to  check  failure  to  pay  bills. 

3.  The  Board  of  Education.     Section  1  of  proposed  ordinance. 

Free  telephone  service  is  given  from  the  Board  of  Education  to  the  public 
schools,  which  means  an  annual  reduction  of  about  $800.  There  is  now  free  service 
from  the  schools  to  the  Board  of  Education. 

4.  Board  of  Election  Commissioners.     Section   1  of  proposed  ordinance. 

It  is  provided  that  the  Board  of  Election  Commissioners,  now  located  in  the 
City  Hall,  shall  have  free  telephone  service.  It  has  hitherto  been  charged  about 


110 

$2,100  a  year,  and  the  charge  was  included  in  the  revenue  of  the  Company,  and 
thus  in  the  surplus. 

5.  Additional  police  telephone  service  is  provided  in  Section  1  of  the  ordi- 
nance, where,  instead  of  "a  single  line"  it  now  reads  "necessary  lines"  are  to 
be  furnished  to  each  police  station.  From  requests  already  received  rt  is  esti- 
mated that  this  will  involve  a  concession  of  $1,000  a  year. 

The  total  of  the  above  minor  reductions  of  11,500  covers  not  only  3,300  indi- 
vidual subscribers,  but  the  Board  of  Education,  the  Board  of  Election  Commis- 
sioners and  the  Police  Department. 

Summary  of  Reductions. 

Eeduction  of  Basis 

Description.                                            Number  of  of  Number  of  Sub- 
Subscribers  Affected.  scribers  Dec.  31, 1912. 

T.     $48.00  business  line 8,200  $170,350.00 

II.     $40.00  residence  line 5,500  85,450.00 

III.     4c  excess  messages  to  nickel  phones, 

mostly  residences   99,150  169,850.00 

IV.     ^c  reduction  in  measured  service  for 

third  1,200  messages.; 4,150  20,900.00 

V.     Toll  at  city  limits 5,000  10,000.00 

VI.     Telephone  bureau 6,750.00 

VII.     Minor  reductions 3,300(1)  11,500.00 


125,300(2)  $474,800.00 

(1)  Exclusive  of  the  Board   of  Education,  the  Board   of  Election   Commis- 
sioners and  Police  Department. 

(2)  Exclusive  of  the  Telephone  Bureau,  the  Board  of  Education,  the  Board 
of  Election  Commissioners  and  the  Police  Department. 

The  classes  of  rates  directly  affected  by  the  above  reductions  have  had,  dur- 
ing the  past  three  years,  an  average  yearly  compound  rate  of  growth  of  15  per 
cent.  With  the  stimulation  to  growth  which  these  reductions  will  make,  and  with 
no  evidence  of  decline,  thus  far,  in  the  general  growth  of  the  Company,  it  is  fair 
to  assume  that  during  the  next  twelve  months  following  July  1  of  this  year,  the 
average  number  of  telephone  subscribers  and  the  average  saving  which  they  will 
secure  under  the  new  ordinance  will  be  15  per  cent,  greater  than  under  the  con- 
ditions of  December,  1912.  This  would  indicate  a  possible  reduction  during  the 
first  year  of  the  new  ordinance  of  approximately  115  per  cent,  of  $474,800,  or 
$546,000.  It  is  a  conservative  estimate  that  the  actual  reductions  will  exceed 
$400,000,  and  that  before  half  of  the  life  of  this  ordinance  is  over  the  reductions 
will  be  much  in  excess  of  this  amount,  while,  of  course,  the  growth  of  the  Com- 
pany will  permit  of  such  increase  in  savings  to  the  subscribers. 

Experience  throughout  the  United  States  and  other  countries  shows  that  where 
a  measured  service  is  encouraged,  as  here,  the  cost  per  message  need  not  be  ma- 
terially greater  in  a  city  of  two  or  three  million  population  than  in  a  city  of 
500,000  population. 

It  is  not  believed  that  under  the  proposed  ordinance  the  operating  costs  and 
fixed  charges  per  message  need  increase  at  all  with  the  further  growth  of  the  city. 
Thus  further  reductions  will  be  rendered  possible  five  years  hence.  The  generally 
observed  tendency  in  this  country  toward  a  more  rapid  growth  of  telephone  ex- 
penses than  of  the  telephone  business,  with  the  growth  of  a  city,  seems  to  be  true 
only  where  most  of  the  business  is  of  an  unlimited  flat  rate  character. 

The  proposed  ordinance  does  not  increase  the  rates  of  any  existing  subscrib- 
ers, even  though  they  should  move  to  a  new  location,  but  it  prevents  the  further 
growth  of  a  class  of  flat  rate  service  used  by  the  largest  business  houses,  and  known 
as  commuted  trunks.  Section  2  (b). 

Tor  such  a  line  $1  a  day  is  paid.  It  is  connected  with  a  private  branch  ex- 
change switchboard,  and  is  used  so  extensively  that  the  largest  subscribers  get 
their  service  for  less  than  1  cent  a  message,  while  the  average  rate  is  only  1% 


Ill 

cents.  This  is  much  below  the  cost  of  the  messages,  and  is  a  discrimination  in 
favor  of  the  large  users  which  should  not  continue.  Any  new  subscribers  to  this 
class  of  service  will  henceforth  pay  from  2  cents  to  2J/4  cents  per  message,  but  will 
secure  three  or  four  lines,  where  they  now  have  one,  and  the  service  will  be  im- 
proved. 

The  largest  users  of  the  flat  rate  business  phones,  for  which  $125  a  year  is 
paid,  also  get  their  messages  for  less  than  2  cents,  and  often  for  less  than  1  cent 
each,  which  is  much  below  cost.  This  also  is  a  discrimination  in  favor  of  the  large 
users  which  should  be  checked. 

The  ordinance,  Section  2  (c),  provides  that  new  subscribers  to  the  above  class 
of  service  shall  pay  by  the  month  at  the  rate  of  $125  per  year,  and  shall  be  al- 
lowed 500  messages  a  month,  with  a  charge  of  2  cents  for  every  additional  mes- 
sage.* Even  then  this  class  of  subscribers  will  hardly  be  paying  their  share  of  the 
cost,  but  this  moderate  charge  will  stop  the  worst  abuses  of  the  present  rates. 

The  increase  in  revenue  to  the  company  by  reason  of  the  prevention  of  the 
growth  of  the  commuted  trunks  and  the  provision,  just  described,  relative  to  the 
growth  of  the  single  flat  rate  line,  would  be  $36,000  a  year  if  the  increasing  num- 
ber of  messages  were  to  continue.  But  where  a  more  or  less  fully  measured  serv- 
ice takes  the  place  of  the  flat  rate,  a  reduction  is  inevitable  in  the  number  of  less 
important  telephone  calls.  Hence,  the  actual  increase  in  the  revenue  to  the  com- 
pany will  be  comparatively  slight.  So  far  as  there  is  an  increase,  it  will  render 
it  possible  to  make  further  reductions  in  charges  five  years  hence. 

Increase  in  Wages. 

After  the  Committee  on  Gas,  Oil  and  Electric  Light  adopted  my  report  on 
telephone  rates,  January  6th,  recommending  that  $700,000  of  surplus  be  appor- 
tioned between  reduction  of  rates  on  the  one  hand  and  increase  of  wages  and  estab- 
lishment of  pensions  and  disability  benefits  on  the  other  hand,  the  company  in- 
creased the  wages  of  its  5,000  telephone  operators  within  the  city  over  $16,000  a 
month,  or  at  the  rate  of  $195,000  a  year.  The  following  tables  give  the  old  and 
new  rates: 

A  day  consists  of  eight  hours  at  the  switchboard  and  a  half  hour  for  rest, 
with  pay  for  the  full  eight  and  a  half  hours.  Evening  operators  work  for  five 
hours  at  the  switchboard  and  are  paid  time  and  a  half,  or,  in  other  words,  they  are 
paid  for  seven  and  a  half  hours.  The  schedule  follows: 


112 


Day. 


-OLD 


-NEW- 


Hourly 
Bate.' 


1  month  11 

2  months  11 

3  months  11 

4  months  11 

5  months  11 

6  months  .11 

7  months  12 

8  months  12 

9  months  .12 

10  months  1.3 

11  months  13 

12  months  13 

13  months  14 

14  months  14 

15  months  14 

16  months  14 

17  months  14 

18  months  14 

19  months  15 

20  months  15 

21  months  15 

22  months  15 

23  months  15 

24  months  15 

25  months  17 

26  months  17 

27  months  17 

28  months  17 

29  months  17 

30  months  17 

31  months  18 

32  months  18 

33  months  18 

34  months '  .18 

35  months .18 

36  months  18 

37th  month  to  42nd  month 19 

43rd  month  to  48th  month 19 

49th  month  to  54th  month 20 

55th  month  to  60th  month 20 

61st  month  to  66th  month 20 

67th  month  to  72nd  month 20 

73rd  month  to  78th  month 20 

79th  month  to  84th  month 20 

85th  month  to  90th  month 22 

91st  month  to  96th  month 22 

97th  month  to  102d  month 22 

103d  month  to  108th  month.  .  .-..   .22 
109th  month  and  on 23 


Monthly 
Equiv. 

$23.84 
23.84 
23.84 
23.84 
23.84 
23.84 
26.01 
26.01 
26.01 
28.18 
28.18 
28.18 
30.34 
30.34 
30.34 
30.34 
30.34 
30.34 
32.51 
32.51 
32.51 
32.51 
32.51 
32.51 
36.84 
36.84 
36.84 
36.84 
36.84 
36.84 
39.01 
39.01 
39.01 
39.01 
39.01 
39.01 
41.18 
41.18 
43.35 
43.35 
43.35 
43.35 
43.35 
43.35 
47.68 
47.68 
47.68 
47.68 
49.86 


Hourly 
Eate. 

.12 
.13 
.13 

.14 
.14 
.14 
.15 
.15 
.15 
.15 
.16 
.16 
.16 
.16 
.16 
.17 
.17 
.17 
.17 
.17 
.17 
.18 
.18 
.18 
.18 
.18 
.18 
.18 
.19 
.19 
.19 
.19 
.19 
.19 
.19 
.19 
.20 
.20 
.21 
.21 
.21 
.21 
.22 
.22 
.22 
.22 
.22 
.22 
.23 


Monthly 
Equiv. 

$26.01 
28.18 
28.18 
30.34 
30.34 
'30.34 
32.51 
32.51 
32.51 
32.51 
34.68 
34.68 
34.68 
34.68 
34.68 
36.84 
36.84 
36.84 
36.84 
36.84 
3684 
39.01 
39.01 
39.01 
39.01 
39.01 
39.01 
39.01 
41.18 
41.18 
41.18 
41.18 
41.18 
41.18 
41.18 
41.18 
43.35 
43.35 
45.52 
45.52 
45.52 
45.52 
47.68 
47.68 
47.68 
47.68 
47.68 
47.68 
49.86 


113 


Evening. 


Work  5  Hours, 
Paid  8  Hours. 

Work  5  Hours, 
Paid  Time  and  %. 

OT  D 

TSTFW 

Hourly           Monthly 

Hourly       Monthly 

Bate. 

Equiv. 

Rate. 

Equiv. 

1  month    

11 

$22.44 

.12 

$22.94 

2  months    

11 

22.44 

.13 

24.85 

3  months    

11 

22.44 

.13 

24.85 

4  months    

11 

22.44 

.14 

26.76 

5  months    

11 

22.44 

.14 

26.76 

6  months    

11 

22.44 

.14 

26.76 

7  months    

12 

24.48 

.15 

28.67 

8  months    

12 

24.48 

.15 

28.67 

9  months    

12 

24.48 

.15 

28.67 

10  months    

13 

26.52 

.15 

28.67 

11  months    

13 

26.52 

.16 

30.59 

12  months    

13 

26.52 

.16 

30.59 

13  months    

14 

28.56 

.16 

30.59 

14  months    

14 

28.56 

.16 

30.59 

15  months    

14 

28.56 

.16 

30.59 

16  months    

14 

28.56 

.17 

32.50 

17  months    '  

14 

28.56 

.17 

32.50 

18  months    

14 

28.56 

.17 

32.50 

19  months    

15 

30.60 

.17 

32.50 

20  months    

15 

30.60 

.17 

32.50 

21  months    

15 

30.60 

.17 

32.50 

22  months    

15 

30.60 

23  months    

15 

30.60 

24  months    

15 

30.60 

.  .  . 



114 


Night. 


Hourly 
Kate." 


1  month    .  .  . 12 

2  months    12 

3  months    12 

4  months    13 

5  months    13 

fi  months    13 

7  months    14 

8  months    14 

9  months    14 

10  months    14 

1 1  months    14 

12  months    14 

1.3  months    15 

14  months    15 

15  months    15 

1 6  months    15 

1 7  months    15 

18  months    15 

19  months 17 

20  months/ „        .17 

21  months    17 

22  months    17 

23  months    17 

24  months    17 

25  months    18 

26  months    18 

27  months    18 

28  months    18 

29  months    18 

30  months    18 

31  months    19 

32  months    19 

33  months    19 

34  months 19 

35  months    19 

36  months    19 

37th  month   to  42nd   month 19 

43rd  month  to   48th  month 20 

49th   month   to   54th   month 20 

55th  month   to   60th   month 20 

61st   month    to   66th    month 20 

67th  month  to  72nd  month 20 

73rd  month  to   78th   month 20 

79th   month   to   84th   month 22 

85th  month   to   90th   month 22 

91st   month   to   96th    month 22 

97th  month  to  102nd  month 22 

103rd  month  to  108th  month 23 

109th   month    and   on 23 

for  five  (5)  hours'  work. 


Monthly 
Equiv. 

$26.01 
26.01 
26.01 
28.18 
28.18 
28.18 
30.34 
30.34 
30.34 
30.34 
30.34 
30.34 
32.51 
32.51 
32.51 
32.51 
32.51 
32.51 
36.84 
36.84 
36.84 
36.84 
36.84 
36.84 
39.01 
39.01 
39.01 
39.01 
39.01 
39.01 
41.18 
41.18 
41.18 
41.18 
41.18 
41.18 
41.18 
43.35 
43.35 
43.35 
43.35 
43.35 
43.35 
47.68 
47.68 
47.68 
47.68 
49.86 
49.86 


-NEW- 


Hourly 
Rate. 

.15 

.15 

.15 

.15 

.16 

.16 

.16 

.16 

.16 

.37 

.17 

.17 

.17 

.17 

.17 

.18 

.18 

.18 

.18 

.18 

.18 

.18 

.19 

.19 

.19 

.19 

.19 

.19 

.19 

.19 

.20 

.20 

.20 

.20 

.20 

.20 

.20 

.21 

.21 

.21 

.21 

.22 

.22 

.22 

.22 

.22 

.22 

.23 

.23 


Monthly 
Equiv. 

$32.51 
32.51 
32.51 
32  51 
34.68 
34.68 
34.68 
34.68 
34.68 
36  84 
36.84 
36.84 
36.84 
36.84 
36.84 
39.01 
39.01 
39.01 
39.01 
39.01 
39.01 
39.01 
41.18 
41.18 
41.18 
41  18 
41.18 
41.18 
41.18 
41.18 
43.35 
43.35 
43.35 
43  35 
43.35 
43.35 
43.35 
45.52 
45.52 
45.52 
45.52 
47.68 
47.68 
47.68 
47.68 
47.68 
47.68 
49.86 
49.86 


There  has  also  been  an  increase  of  $30,000  since  January  1st  in  the  wages  of 
other  employes  in  the  city  engaged  in  the  operating  as  distinct  from  the  construc- 
tion departments,  and  receiving  less  than  $200  a  month.  Thus  $220,000  of  the 
$320,000  required  in  this  ordinance  has  already  been  given  in  increased  wages, 
and  the  remaining  $100,000  of  increase  will  surely  follow  the  passage  of  the  ordi- 


115 

nance,  as  provided  in  Section  3  of  said  ordinance.  This  $320,000,  which  must  be 
maintained  during  each  of  the  coming  five  years,  cannot  fail  to  improve  the  serv- 
ice. It  will  be  an  inspiration  to  many  of  the  girls  to  remain  in  the  service  longer 
than  would  otherwise  be  the  case.  Much  of  the  poor  service  of  which  complaints 
are  made  is  due  to  the  inexperience  of  the  girls  who  have  to  be  continually  taken 
on  to  replace  those  who,  after  receiving  their  training  for  the  service,  drop  out, 
for  various  reasons. 

Pensions,  Disability  Benefits  and  Insurance:  The  Chicago  Telephone  Com- 
pany, in  common  with  the  other  Bell  companies  of  the  United  States,  adopted, 
early  in  March,  1913,  an  employes'  pension,  disability  and  insurance  plan,  which 
even  in  March,  although  the  system  was  not  fully  developed,  entailed  an  expense 
upon  the  local  company  as  follows: 

Accident  benefits $1,130.00 

Sick  benefits 7,586.85 

Disability  benefits    » 168.95 

Insurance  benefits   .  994.50 


Total  $9,880.40 

This  means  that  the  company  is  already  spending,  under  the  new  plan,  about 
$10,000  a  month,  or  $120,000  a  year,  upon  these  various  benefits,  while  the  ex- 
pense in  previous  years  to  meet  all  claims  of  employes  on  account  of  the  above 
causes,  was  $15,000  a  year. 

Without  attempting  to  give  the  entire  scheme  of  benefits,  a  few  illustrations 
may  be  here  presented: 

Pensions  are  given  to  men  who  have  been  in  the  employ  of  the  Company  twenty 
years  and  are  sixty  years  old,  and  to  women  who  have  been  employed  twenty 
years  and  are  fifty-five  years  of  age.  The  amount  is  1  per  cent,  of  the  average 
annual  pay  during  ten  years,  for  each  year  of  service.  For  example,  if  a  person 
employed  twenty  years  had  received  for  ten  years  an  average  pay  of  $100  per 
month,  or  $1,200  a  year,  and  had  otherwise  complied  with  the  above  conditions,  he 
could  receive  a  pension  of  20  times  1  per  cent,  of  this  amount,  or  $240  a  year. 

Accident  disability  benefits  amounting  to  full  pay  for  thirteen  weeks  and  half 
pay  for  the  remainder  of  absence,  not  to  exceed  six  years  in  all,  are  provided. 

Sickness  disability  benefits  for  those  who  have  been  employed  from  two  to 
five  years  amount  to  full  pay  for  four  weeks  and  half  pay  for  nine  weeks,  after 
the  first  seven  days'  absence.  All  those  who  have  been  employed  from  five  to 
ten  years  receive  pay  for  thirteen  weeks  and  half  pay  for  thirteen  weeks.  Larger 
benefits  are  given  to  those  who  have  worked  for  more  than  ten  years. 

Life  insurance  benefits  are  paid  to  beneficiaries  after  employment  for  five 
years  or  more.  Larger  benefits  are  paid  aften  ten  years,  but  not  to  exceed,  in  any 
case,  $2,000. 

Death  benefits  due  to  accident  while  in  the  employ  of  the  Company  bring  to 
the  beneficiary  three  years'  pay,  not  to  exceed  $5,000  whether  the  employe  has  been 
at  work  a  long  or  short  time  for  the  Company. 

While  the  Company  is  left  free  to  change  the  general  plan  of  benefits  just  put 
into  effect,  a  copy  of  which  is  filed  with  this  ordinance,  the  Chicago  Telephone 
Company  is  pledged  to  pay  at  least  $100,000  a  year  in  the  above  classes  of  benefits 
to  its  employes  during  each  of  the  next  five  years. 

Summary  of  Wages,  Pensions  and  Disability  Benefits. 

During  the  last  four  years  the  Chicago  Telephone  Company  has  increased  the 
wages  for  the  same  positions  about  $100,000.  This  is  aside  from  the  increases  in 
the  number  of  employes  or  of  positions  filled.  Under  the  proposed  ordinance  the 
Company  obligates  itself  to  increase,  during  the  current  year,  by  $420,000,  the 
wages  and  pensions  to  those  receiving  less  than  $200  a  month,  and  to  maintain 
this  new  wage  during  each  of  the  next  five  years.  It  is  already  spending,  under 
these  heads,  at  the  rate  of  $325,000  a  year  more  than  in  1912. 

Doubtless  the  employes  of  the  Company  will  secure  further  increases  during 
the  coming  five  years.  This  ordinance  in  no  respect  stands  in  the  way  of  it,  but 


116 

merely  enforces  a  jump  of  at  least  $420,000,  aside  from  increases  to  the  higher 
paid  employes,  during  1913  and  the  coming  years,  instead  of  the  usual  rise  of 
$100,000  a  year  in  the  wages  of  all  positions  under  $200  a  month. 

Meters. 

The  new  ordinance  (Section  2-(j)-),  provides  that  any  subscriber  to  the  meas- 
ured single  party  line  without  a  switchboard,  who  desires  a  meter,  may  have  one 
by  paying  a  rental  of  $1.80  a  year.  Gas  and  electric  light  companies  supply  meters 
free.  The  telephone  company,  however,  does  not  need  meters  at  the  subscribers' 
premises,  for  under  the  1907  ordinance,  which  is  still  continued,  it  must  have 
meters  at  its  own  offices  on  each  measured  service  line.  Of  course,  any  subscriber 
who  wishes  a  meter  should  have  a  chance  to  secure  one,  but  the  meter  and  its  in- 
stallation costs  about  $9,  and  both  elsewhere  and  among  the  180  users  who  have 
had  such  meters  on  trial  in  Chicago,  it  has  been  found  that  while  the  public  like 
the  idea  of  a  meter  when  it  is  called  to  their  attention,  they  do  not  usually  care 
to  keep  it  after  they  get  it.  It  slightly  slows  up  the  service,  for  one  must  push  the 
button  on  the  meter  in  order  to  get  the  attention  of  the  operator,  and  the  meter 
must  be  fastened  to  some  desk  or  wall,  where  it  is  often  in  the  way  and  difficult 
to  read.  Since  comparatively  few  users  find  the  meter  worth  while,  it  seems  that 
useless  expense  will  be  entailed  upon  the  telephone  company,  and  ultimately,  there- 
fore, upon  the  subscriber,  if  the  company  is  forced  to  install  20,000\  to  40,000 
meters  when  less  than  5,000  want  them.  If  20,000,  or  half  the  number  who  are 
entitled  to  meters  under  this  ordinance,  should  ask  for  them,  the  cost  to  the  Com- 
pany would  be  nearly  $50,000  a  year,  for  interest  and  maintenance  upon  those 
meters  that  might  thus  be  called  for.  The  yearly  cost  of  a  meter  is  over  $2.  The 
Company,  indeed,  claims  that  the  cost  will  be  $3,  and  there  is  reason  to  suppose  that 
it  will  be  at  least  $2.50.  A  charge,  therefore,  of  $1.80  a  year  appears  to  be  entirely 
reasonable. 

Emergency  Button. 

The  chief  popular  objection  to  the  Nickel-first  telephone  has  been  the  inability 
to  reach  "Central"  without  first  dropping  the  nickel  or  slug,  in  case  of  sudden 
need  for  the  fire  or  police  departments.  This  is  remedied  by  the  requirement  of  a 
push  button  or  other  device  which  will  enable  the  subscriber,  in  an  emergency,  to 
call  the  operator  without  the  deposit  of  a  nickel.  (Section  2-(d)  ).  This  must  be 
installed  within  eighteen  months,  for  all  telephone  subscribers  desiring  the  same. 

Every  subscriber  can  keep  either  Nickel-first  or  Nickel-last  telephone,  as  de- 
sired, and  every  new  subscriber  can  choose  which  he  will  have. 

The  Telephone  Bureau. 

By  another  ordinance,  reported  out  of  the  Committee  on  Gas,  Oil  and  Electric 
Light  May  15th,  and  by  Section  4  of  this  ordinance,  a  telephone  bureau  is  pro- 
vided, under  Civil  Service  regulations,  as  part  of  the  department  of  electricity. 
This  bureau,  as  suggested  in  my  printed  report  of  October  25,  page  74,  will  serve  a 
very  important  purpose  in  securing  improved  service  and  in  the  enforcement  of  all 
ordinances  affecting  telephone  service  and  charges.  It  will  cover  the  service  of 
every  telephone  company  in  the  City  of  Chicago. 

(Signed)     EDWAED  W.  BEMIS. 

NOTE — After  the  above  statement  was  written,  the  ordinance  was  amended, 
so  as  to  provide  for  subscribers'  meters  on  payment  of  $3  installation  charge,  with 
$1  refund  if  the  subscriber  should  order  the  meter  removed. 

Another  amendment  provided  that  any  payments  above  the  guarantee  for  any 
month  should  be  used  in  payment  of  deficits  that  might  occur  during  the  following 
two  months,  as  well  as  in  case  of  deficits  during  the  preceding  two  months. 

These  two  provisions  mean  further  gains  of  over  thirty  thousand  dollars  to 
the  telephone  subscribers  of  Chicago. 


